Take Five #031: Are searchers the most hated buyers to work with? One man’s take, and more
Codely v2.0 public release is here
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What has changed in our latest release?
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All new features available for all public channel users
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Coding collaboration with over 200 users at once
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Take Five #031: Are searchers the most hated buyers to work with? One man’s take, and more
1. SDE vs EBITDA vs Cash Flow: definitions of profitability you need to know like the back of your hand
Great in-depth read by our favorite PE investor turned self-funded searcher turned SMB operator on how to think about profitability & multiples in a consistent manner:
Why does any of this matter?
Because if you hear someone say they bought a business for 4.5x, you have no idea if that’s a good deal or not.
If they bought a biz for 4.5x SDE of $1M (so $4.5M price), but there’s like $400K in replacement costs to replace the seller, that means EBITDA is $600K. That means they paid 7.5x EBITDA! On the other hand, if they paid 4.5x Buyer’s EBITDA…that’s pretty solid.
How do you know that? Because the 7.5x Buyer’s EBITDA deal will have a way lower unlevered free cash flow yield than the 4.5x Buyer’s EBITDA deal.
Similarly, you may see lots of self-funded deals that boast 80%+ equity returns. These are LEVERED returns. That doesn’t mean it’s a good deal, it’s just a function of the massive leverage allowable by the SBA 7(a) loan program. It’s usually cleaner to compare deals on an unlevered yield basis, and then compare how much debt you can prudently put on each deal.
Knowing these definitions of profitability like the back of your hand is a core muscle of being a disciplined business acquirer. You’ll develop a sixth sense for whether or not a deal makes sense when these profitability concepts are hardcoded into your brain.
From “SDE vs EBITDA vs Cash Flow” by Guesswork Invest
2. From the trenches: one buyer's experience after year one of operating their new acquisition
3. “Here is my journey of trying to understand the working capital required in my business.”
Jordan Novgrod on the practical (and terrifying) nitty gritty pressure of having to make payroll and not having enough money in the bank in his new acquisition:
A couple of things got me into a precarious spot with working capital. First, the extra expense of closing with bank fees being higher than projected. Additionally, my lawyer’s bill being higher than expected due to unnecessary back and forth between the lawyers. This lowered my working capital at close. Also, the wonderful FED that has raised the interest rate to crush the economy, which even before my first loan payment raised my loan payments not insignificantly. In the FED’s infinite wisdom they raised it again, and next month is going up again.
I would not even have had working capital at close, had the loan underwriter not suggested that I have both line of credit working capital, and some worked into the initial loan. My initial reluctance for adding this long-term debt was overcome, by the loan underwriters story of having a working capital crunch of his own when he ran a business. This meant in addition to 1 month of revenue + $50K working capital, I also received 1 month of revenue from the start. The bank asked why I needed both, and I told them that the line of credit was needed for growth.
This additional money ended up being critical as I did not fully understand the working capital requirements of the business. An example, for one of the projects which was a $50K sale of custom handrails, I had to outlay $11K of money the week I bought the business to buy the materials via wire transfer. This was unusual because usually, our suppliers are on NET 30 terms with us (aka we would have 30 days to pay). Then over the next month I had to pay the wages of the team, including the overhead, as they completed this work. I delivered these handrails to the customer, and invoiced them with our usual NET 30 terms. We didn’t get paid for 50 days because the customer had not gotten paid by their customer, the county government. Start to finish, money was outlaid for over 3 months before it came back.
From “Working Capital, it's so simple” by Jordan Novgrod
4. Are searchers the most hated buyers to work with? One man’s take:
5. Top highlights from the HBS ETA conference last week:
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