So I think I will do a few posts on deal criteria because people always ask me about it. In this post I will talk about the range of earnings that a company should have for it to be on my radar. I should point out that I always change this criteria depending on the day of the week, my mood, the stock market, and if I’m having a bad day. However I always come back to the same range. There are times when I go sky high end times when I feel like buying this a store down the street. But we’ll have to come back to reality at some point.
When I look at businesses above $1,000,000 in EBITDA I get stars in my eyes. I end up wanting just about every business at that level or above. I even get more stars in my eyes when I see a business that has 50,000,000 in sales. But my internal alarm goes off when the company is that big. I know that I cannot be chasing down $50,000,000 companies. At least not yet and maybe not ever because it’s not really necessary.
But I do know that $1,000,000 in EBITDA is very much within my means for the most part. So OK one million dollars is in my sweet spot. But that doesn’t mean that it is the only deal I will consider. I need to have a range of companies to target. In order to do that I need to have the maximum amount of enterprise value in my head. Then I need to understand what the smallest value is that could sustain my lifestyle. Note that when I talk about EBITDA this number almost always is calculated after paying the general manager. However when you get down to the $500,000 level then it isn’t so clear. It may well be that you are going to be paying a manager that if that level of profit.
The quick calculation goes like this: a $500,000 EBITDA essentially translates to about a $200,000 net after closing a deal. This could mean that I could draw down the $200,000 a year salary after paying the debt service. This would assume roughly $1,500,000 purchase price and a $300,000 per year debt service. While this may be optimistic I am probably OK with $100,000 salary the first year.
So all this is meant to say that my lifestyle is best supported in the range of about 500,000 to $1,500,000 in profit. This means an enterprise value of any where between $1,500,000 and $6.0 Million. I do not believe that six million dollars is too much of a stretch. The reason is I believe I can bring in a enough partners if I need to in order to pull the deal off. And by partners I mean lenders/investors/operating partners. Do I really want any of these guys in my deals? No but I can live with them if it will get the deal done.
So I do not need to go crazy with the sales numbers and figure I can buy a $100,000,000 deal. If I ever did glue that one together I would never get much of the pie anyway. So at my tight little range at $500,000 to $1.5 Million I am happy because the numbers are very lucrative even at that level. Trust me, a $1.0 Million profit level per year is lots of money even when you have to pay debt service out of that number. I mean how many years will a startup take to achieve that? If ever.
Of course if things get tough you can always go lower in the profit level. But if you do go lower the numbers just don’t make a great deal of sense unless you wish to work inside the company.