Hi searchers & co.,
I'm trying to improve how I project changes in my acquisition targets. As it stands, I haven't felt confident that I can spot real EBIDTA growth opportunities. This limits me to focusing mainly on a company's historical performance and its EBIDTA multiple. On the other hand, I've yet to reach post-LOI due diligence; my hunch is that better understanding this process will increase my confidence in submitting LOIs and shopping deals around with investors.
A few prompting questions:
1. How have you come up with ideas or bets for improving company operations? How dependent are these proposals on your personal experience?
2. When do you begin to solidify these ideas and their specific impact on the business? Do they matter pre-LOI? How sure are you of your proposals before close (e.g., while securing equity investment)? And how much are these plans expected to change post-LOI?
How do you project EBIDTA growth for your acquisition?
by a searcher from Columbia University - Columbia Business School
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Build out several cases.
For base case, you typically don’t assume any particular improvements other than revenue growth at an overall industry rate and some basic Opex leverage. May keep EBITDA margin the same throughout the period and add “growth” Opex, like marketing expense (revenue growth is rarely free).
In a downside case, you project how revenue and EBITDA need to behave for you to break even. Hopefully, that’s well above the current operating levels and you have a lot of safety margin.
Upside case is where you pull additional growth levers. This would depend on the type of specific business you’re evaluating. I would ask for advice from people who operated similar business. Case studies might also help.
One thing to watch out is to not be too aggressive on both revenue growth and expense cutting. Revenue growth requires investment - whether it is headcount, tech tools, warehouse expansion, etc. Calculate various ratios (e.g., Capex/Revenue) and ensure there is some consistency throughout the projection period.
Good luck!