What’s one number you wish sellers disclosed before you spent time on a deal?
Revenue and EBITDA are usually easy to find in a teaser, but other numbers can completely change how attractive a business looks.
For example, how much revenue comes from the largest customer? How much cash is tied up in inventory and receivables? How much does the business spend each year just to maintain its equipment?
Two businesses with similar EBITDA can have very different cash flow and capital requirements.
For those who’ve been through acquisitions, what’s one number you wish you’d known earlier in the process? Did you discover something during diligence that materially changed how you viewed the deal?
I would say that I wished my seller told me in my last year of high school that the ROI from blow is particularly high if you pair it with straight vodka. Beer, seltzers and fancy wancy cocktails do a little, but not much. However, if you swig a bottle of vodka on the sly through the night, it significantly increases the strength and duration of the high and really takes the paranoia/edge off. You will feel like prime Luke Skywalker and should only need a top up bump every 45-60 mins. The best thing about it is you’ll still have some left in the bag in the AM, so you can do a cheeky scoop before your shower and then another one right before you head out the door to work.
When evaluating a deal, one critical number that often gets overlooked but can significantly impact the attractiveness of a business is future capex requirements. Based on the most helpful WSO content, understanding how much capital expenditure (capex) is needed—whether for routine maintenance or expansion—is crucial. This directly affects free cash flow, which is the lifeblood of private equity investments.
Two businesses with similar EBITDA can indeed have vastly different cash flow profiles due to varying capex needs. For example, if a business requires substantial ongoing investment to maintain its operations or expand, it can drain cash flow, making it less appealing despite strong EBITDA margins.
Additionally, debt levels are another key factor. If a company has a high leverage ratio, much of its free cash flow will be consumed by servicing debt, leaving little room for returns to investors. Even if the leverage ratio is high, the deal might still work if the company generates enough free cash flow to cover debt obligations and provide a cushion for the new investor.
In summary, beyond revenue and EBITDA, numbers like future capex requirements, leverage ratios, and cash flow impact from inventory and receivables are game-changers during diligence. These metrics can reveal whether a business is truly sustainable and worth pursuing.
Sources: Thinking like an Investor: The key financial metrics, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, How to talk around confidential info in deal discussions?
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