When evaluating deals, I like to have multiple ways to win. There are 4 main ways to generate a return. Organic growth, cash flow, buying m&a below your basis, and multiple expansion. You don’t need a fancy model to know how much value these impact your return by. See below
1: organic growth: often times we buy businesses knowing this won’t be a big lever to generate a return and that’s okay. This is one of the few levers it’s hard to control / underwrite (outside of assuming you’ll be a rockstar salesperson and put the team on your back)
2: cash flow: we typically like to buy businesses that have low capex needs and EBITDA is a good(ish) proxy for FCF. Having said that, if you’re buying a busy with a lot of capex, price it off OCF multiples (operating cash flow = EBITDA - CAPEX) vs a traditional EBITDA Mult. Make
Sure to use a capital structure that the biz can support and that can generate cash and not overly burden yourself with debt/interest, which can put you in a tight spot or force you to lose the keys to the business
3 M&A. This quick bridge / model doesn’t include the benefit of m&a, but m&a is a great lever to diversify the businesses customers, end markets and service offering, which can increase your exit multiple by making the biz inherently less risky. m&a can also blend down your basis
4: multiple expansion can be achieved through professionalizing a biz, marketing it better at exit, diversifying the biz thru m&a or organic growth or timing the cycle and getting lucky. It’s hard to underwrite getting lucky but professionalization & scale are two good tools
Overall, good deals can be assessed on a napkin or simple bridge. No need to over complicate the model. If anyone has questions on the calculations feel free to leave a comment
@thomasince @YourDealTeam what did I miss?
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