400 Deal-Breaking Decisions

A framework for understanding the key aspects of business acquisitions and what makes them successful, focusing on leadership teams and deal structures.

Target Company Characteristics

• Looking for companies in transition phase

  • Too big to be small, too small to be big
  • At or just crossed the "line of professionalization"
  • Need systems and talent to grow larger

• Protected market position

  • Not commodity businesses
  • Must have unique characteristics to build upon
  • Something unusual that enables growth

Leadership Team Requirements

• Must have base skills and excellence in their domain
• Willing to scale and grow
• May not be current owners
  • Sometimes owners are part-time/uninvolved
  • Leadership team continuity is valued
  • Can augment existing talent over time

Deal Structure Elements

• Multiple typically 3.5x to 5.5x EBITDA
• Payment structure:
  • 2-3.5x cash at close
  • Remainder in earnouts/performance-based
  • Second "bite of apple" potential for staying leaders

Financial Metrics Example

• Owner earnings of $3M typically means:
  • EBITDA of $3.5M-4M for standard business
  • Can vary by industry (example: aerospace needed more reinvestment)
  • Must account for necessary reinvestment in equipment/inventory

Deal Complexity

• Approximately 400 decisions in acquisition process
• Each decision is an opportunity for disagreement
• Time-consuming and difficult to align all parties
• Must ensure deal feasibility early in process

Owner Motivations

• Taking chips off the table
• Need help scaling/growing
• Usually have some form of exit in mind
• Typically not looking for 30-40 year commitment
• May want liquidity while maintaining involvement