Acquiring Minds Don't Be Tempted: 8 Signs of a Bad Business
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Jun 28, 2022 Ryan Doyle, a searcher with a finance background, and Heather Anderson, co-director of Sponsor Finance for Search Fund Lending, delve into critical pitfalls for business buyers. They highlight eight major warning signs of a bad investment, including overvaluation and unsustainable margins. Ryan shares his list of time killers that can derail searches, while Heather discusses the challenges of financing smaller firms. Together, they emphasize the importance of due diligence and understanding market dynamics to avoid costly mistakes.
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Avoid Overvalued Businesses
- Avoid businesses priced above 4 times SDE as they rarely pencil out well.
- Normalize EBITDA for COVID impacts to assess true business valuation fairly.
High Margins Signal Key Man Risk
- Extremely high EBITDA margins often indicate key man risk and lack of infrastructure.
- Such "stupid margin" businesses are usually owner-dependent and not scalable easily.
Avoid Too-Small Businesses
- Avoid very small businesses under $500K EBITDA due to high fragility and higher risk.
- Target $750K to $1.25M EBITDA for optimal search economics and financing options.