SMB ETA: Evaluating 2 opportunities

Little background and a request for candid opinions: I’m a Chitown trading jock. Big 10 degreed in econ. Mid-career, late 30s and I'm looking for the next adventure: buying a small business.

I realize this PE forum is for you big swinging D's, but hoping the experience and insight here can help me make a better informed decision. No one else in my professional network has done ETA, and I don't have an MBA. A few of my techy MBA buds have been useless on this topic.

Been negotiating LOIs on 2 deals, and looking to lift the seller’s offer on one or other. Both deals approx. $1 million adjusted EBITDA and looking to trade around 4x.

One business is a B2B light manufacturing/distributor ($6m revenues) inventory-heavy, asset-light. The other business is industrial services ($3m revenues), asset-heavy, inventory-light and a mix of B2C and B2B. COGS running higher for the manufacturing co, hence the significantly higher gross margin for the service biz.

The manufacturer probably has a slightly better economic moat and higher barriers to entry, but likely slower growth potential; market is mature with well-entrenched, big established public players.

The service co has lower barriers to entry, but the market is more fragmented with smaller industry players and is more roll-up friendly. Organic growth likely higher with the service co.

So, given this scenario: two businesses, same EBITDA, same multiple, differing gross margins: which would you want to buy and why?

Feel free to ask any other questions.

Thanks for reading,
Eddy

3 Comments
 

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