Does anyone find anything wrong with companies that have very high margins?

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June 21, 2023

by a searcher from Boston College in Pittsburgh, PA, USA

Obviously, intuitively the higher the EBITDA margin the better, but has anyone had experiences where a higher margin meant something not as desirable behind the scenes? In the sense that the margin is "too good to be true", perhaps there is customer concentration, lack of regulation, they misrepresent the numbers, other things I am missing?

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Reply by a searcher
from Stanford University in Dallas, TX, USA
Yes. Especially when there is not significant IP or competitive edge. I have personally been bitten by this. The company I acquired had more than 50% EBITDA margin. I was skeptical of this, so I required a 50% seller note. After the acquisition, it was clear that the seller was cutting some serious process corners that lowered his labor costs. Fortunately I was able to leverage that in negotiating a 50% reduction in the note post acquisition.
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Reply by a searcher
from York University in Waterloo, ON, Canada
My main concern would be that the business is unsustainably lean and that by the time you right-size margins will return to industry average.
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