HBR Guide to Buying a Small Business by richard s. ruback royce yudkoff

Author:richard s. ruback, royce yudkoff
Language: eng
Format: epub
Published: 2018-06-27T16:00:00+00:00

Quantitative Filters

In this chapter, we have added some quantitative filters to help you assess the enduring profitability of a prospect:

Does it have a high EBITDA margin?

Does it have recurring customers?

Does it have fragmented customers and suppliers (no concentration)?

Does revenue growth come from the right places?

Does it have steady sales (not cyclical)?

Returning to Randy Shayler’s analysis of Zeswitz Music, he found that the company’s EBITDA margin in 2011 was almost 45%, which was very impressive. Most of the sales came from rentals, and the CIM indicated that those relationships with the schools recurred year after year. The CIM also contained information on customer and supplier concentration, and neither was a concern. The growth in rental revenues was slow and seemed to come from the relationships with school districts that were dissatisfied with their current vendor; the revenue from existing relationships was steady because the student population and the proportion participating in music programs with the schools was more or less constant. The long-term financial information provided in the CIM confirmed Randy’s expectation that the business was not cyclical and did not suffer a substantial reduction in rentals during the recession. Overall, his analysis convinced him that Zeswitz was an enduringly profitable business.

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