What are the factors you should look at when you decide to purchase a company?
This is actually a really good question. I don’t discuss that much cause, I don’t want people knowing cause it’s gonna create more competition, but I’ll tell you what I look for and this is applicable to any type of companies out there if you want to purchase some.
Factors You Should Look Before Buying Any Business
I look for EBITDA. At least three years worth of EBITDA. So I’m looking for three years running revenue and profit and I buy companies for 2.5 to 3 times profit, a yearly profit. I won’t pay a dollar more than that. I also look for companies that have high expenses and I cut the fat.
I know that sounds ugly, but it’s a reality, right? I’ll cut the fat, I’ll make it more profitable. I’m also looking for companies that again, roll up and that’ll fit directly into my core business. So if it’s a business that adds value, even if it makes no revenue, I don’t care. In other words, I’m looking for businesses in the same space that have a ton of traffic.
So a really affordable acquisition when I look at how much revenue I can generate per visitor. It’s an expensive acquisition when you look at how much multiple I’m paying, cause I’m buying zero in revenue, there are expenses, and I’m just buying the website. I don’t get the revenue, I don’t get the software, anything like that. So those are the main factors I’m looking for, I’m not really looking for a team to come carry over when I’m buying companies, more so, three years worth of revenue, profit, right? And I wanna pay a multiple of 2.5 to 3 X profit.
And the last thing I’m looking for is traffic. So anyone who’s a leader in my space that I can buy, especially if they’re not making much, to them, I may end up giving ’em like, few hundred grand, a half a million, million dollars and they’ll be like, oh my god, I got a million bucks when I’m losing money. I’m like, yeah, no problem, cause look, you know, get rid of the team, I know this sounds ruthless but sadly, sometimes this is what business comes to and I’ll take everything and I’ll merge it over into my core site. Now, of course, if there are talented people on that team, I’ll take em over or I’ll try to find them a job. Any time I let someone go, I go above and beyond to hit up other people I know and really go to bat for those people and try to place them in another job.
But that’s my strategy when it comes to buying businesses and when I do that, I wanna be the largest in my space, so I’ll keep buying other people just to be the largest because once you’re the largest, the amount of multiple that you get on valuation is much larger. So a lot of times, companies will be worth three, four X, five X profit, sometimes even three, four, five X revenue. But if you’re the leader in the space, sometimes you’re worth 10, 20 X revenue. So I’ll buy a lot of smaller players up for cheaper, merge ’em all in, I’ll be the biggest player, and I’m doing an arbitrage on the multiple. That’s my strategy with acquisitions.
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