How do you all look at potential deals?

When evaluating potential deals, private equity professionals focus on a mix of financial, operational, and qualitative metrics. Based on the most helpful WSO content, here’s a breakdown tailored to your B2B tech-enabled services business with AI automation:

Key Metrics to Evaluate Deals:

1. Revenue Growth:

   • For B2B tech-enabled services, consistent revenue growth is critical. PE professionals often look for a CAGR of 10%+ over a few years.
   • Recurring revenue models (e.g., subscription-based) are highly valued.

2. Gross Margin:

   • High gross margins are expected in tech-enabled services, often in the range of 70-90%, especially if AI automation reduces operational costs.

3. Net Income %:

   • While early-stage businesses may not have strong net income, PE firms will assess the scalability of your model and its ability to achieve profitability over time.

4. Free Cash Flow (FCF):

   • Cash flow is king in PE. They’ll evaluate your ability to generate FCF after covering operational expenses and capex. Low capex requirements (e.g., 5% of revenue) are a positive signal.

5. Customer Metrics:

   • Gross/Net Retention Rates: High retention rates (90%+ gross retention) indicate customer stickiness.
   • Customer Acquisition Cost (CAC) vs. Lifetime Value (LTV): A favorable LTV/CAC ratio (e.g., 3:1 or higher) is a strong indicator of efficiency.

6. Recurring Revenue:

   • The percentage of revenue that is recurring (e.g., contracts, subscriptions) is a key metric. Higher recurring revenue reduces risk and increases valuation.

7. EBITDA Margins:

   • Strong EBITDA margins (~20% or higher) are often a benchmark for tech-enabled services.

8. Capex Requirements:

   • Low capex requirements are preferred, as they allow for more cash to be reinvested or distributed.

AI-Automated Business Processes:

• Perception: AI automation is increasingly seen as a value driver. It can enhance scalability, reduce costs, and improve operational efficiency, which are all attractive to PE investors.
• Key Considerations:
  • How defensible is your AI technology? Proprietary AI solutions or unique applications of AI can be a competitive advantage.
  • Does AI reduce reliance on human labor, and how does it impact margins?
  • Are there risks associated with AI implementation (e.g., regulatory, ethical, or technical challenges)?

Industry-Specific Benchmarks:

• For tech-enabled services, benchmarks often depend on the sub-sector. For example:
  • Software-like businesses: Valued on revenue multiples (e.g., 5-10x ARR for high-growth companies).
  • Service-heavy models: Focus on EBITDA multiples (e.g., 8-12x for mature businesses with strong margins).

Additional Insights:

• Qualitative Factors: PE firms will also assess the strength of your management team, market positioning, and scalability of your business model.
• Market Size: A large and growing addressable market is crucial for PE interest.
• Customer Concentration: Diversified customer bases are preferred to reduce risk.

For your B2B tech-enabled services business, emphasizing recurring revenue, scalability through AI automation, and strong retention metrics will make your business more attractive to PE investors. If you’re bootstrapping, demonstrating profitability or a clear path to profitability will also be a significant advantage.

Sources: Thinking like an Investor: The key financial metrics, PE recruiting technical questions (software specific), Private Equity: How to Analyze a CIM Effectively?, PE recruiting technical questions (software specific), Beginners Guide to Valuation and Metrics By Sector