By Chris Sheppard
I recently chatted with a large company in the education and ed-tech industry. This company periodically acquires mid-market and lower mid-market companies. I want to share with you what this particular company typically pays for the companies it acquires, the characteristics of those companies, and what kinds of deal terms this company typically seeks in the transactions it conducts. Please understand that this is just one data point, but the information below can give you some insight into what strategic buyers are looking for when evaluating education and ed-tech companies to acquire.
What Does This Strategic Buyer Pay for the Companies it Acquires?
The company uses Operating Income multiples as its valuation metric when evaluating potential targets. Operating income includes the company’s overhead and operating expenses, depreciation, and amortization. However, operating income does not include interest on debt and tax expenses. Companies within this large strategic acquirer’s industry and the size range this company is looking for in acquisitions have, on average, operating income ratios of 81% of EBITDA ratios. This means the average operating income per company is about 81% of the average EBITDA. [Source: bvresources.com]
The Value Range and Size Range of Companies this Strategic Buyer Acquires:
| Low-End Threshold | High-End Threshold | |
| Operating Income Range | 4.5x to 5.0x (Operating Income) | 11x (Operating Income) |
| Size Range | $6 million – $8 million (probably an opportunistic buy at this size) | $200 million |
Notes:
What are the Company Characteristics this Strategic Buyer Looks for in Acquisitions?
Degrees of Importance
| Important | 1 |
| More Important | 2 |
| Most Important | 3 |
| Characteristics | Minimum Desired Characteristics Low End of Adjusted EBITDA Multiple Range | Most Desirable Characteristics High End of Adjusted EBITDA Multiple Range | Degree of Importance |
| 1. Financials: Revenue Growth Rate | ·Zero or static growth | · Greater than 10% | 3 |
| 2. Financials: Gross Profit Margin | ·Service Businesses: greater than 30% SaaS businesses: can vary | · Service Businesses: 40% or greater SaaS businesses: can vary | 1 |
| 3. Financials: Operating Income Margin | 10% margins | ·Greater than 15% is considered good. 20% – 25% is very attractive | 3 |
| 4. Financials: CAPEX Margin | ·A reinvestment rate of 6% to 10% per year. 6% is where it begins to look unattractive. | 2 | |
| 5. Financials: LTV / CAC | ·A Lifetime Value of a customer / Customer Acquisition Cost ratio under 3; a ratio of 2 is especially worrisome. | · Audited financials | 1 |
| 6. Financials: Accounting Processes, Systems, and Oversight | ·Can work through unorganized financials, but there must be enough there to drill down to accurate numbers | · Audited financials | 1 |
| 7. Customers: Customer/Sales Channel Concentration | · If the top customer represents 20% of the company’s revenue or above, then this is a cause for concern. ·If the top customer represents 20% of the company’s revenue or above, then this is a cause for concern. | 3 | |
| 8. Customers: Types and Character of Revenue | · Steady, predictable reoccurring revenue. · Subscription revenue if possible. | 2 | |
| 9. Customers: Sales Team | ·A fully developed sales team isn’t a requirement, but if the company’s sales are based on and tied to the owner’s relationships, then there must be a way for the owner to transfer those relationships. | ·Fully developed sales team. ·Company’s sales are not dependent upon owner(s) personal relationships. | 1 |
| 10. Value Prop & Competition: Value Prop Characteristics | · A differentiated product/service not subject to commodity price pressures. · DEALBREAKER: A commodity product/service subject to intense market competition (leading to low operating income margins). | · A highly differentiated product or service with stable/growing demand and good margins. ·Great brand names provide momentum. Good IP protection for products and services is ideal. | 2 |
| 11. Value Prop & Competition: Competitive Landscape and Geography | ·Differentiated products; able to compete effectively without just being the cheapest option. ·Acquisition targets should be able to deliver at least 10% of the market niche they are operating in. ·North America is a more mature market with higher competition. | ·Highly differentiated, excellent quality product/services with few competitive alternatives. ·International markets have more room for growth and less competition for the company’s products and services at the moment. | 2 |
| 12. Markets & Industry: Market Size | ·Company doesn’t want to be in a market that is declining. ·Niche educational markets are fine, but must make strategic sense to the company. | ·A lot of growth is occurring in international markets, so the company is attracted to companies that service international education markets. | 2 |
| 13. Markets & Industry: Cyclicality of Industry | ·Not a concern for the company. It buys companies that are cyclical and countercyclical. ·Dealbreaker: Company is very cognizant of regulations concerning government classification. Will not engage with a company that doesn’t pass national or local regulatory hurdles. ·Company is also concerned about the court of public opinion (bad PR) | 1 | |
| 14. Markets & Industry: Regulation | ·Dealbreaker: Company is very cognizant of regulations concerning government classification. Will not engage with a company that doesn’t pass national or local regulatory hurdles. ·Company is also concerned about the court of public opinion (bad PR) | 3 | |
| 15. Personnel: Management Team Characteristics | ·Company is happy to work with former owners and have them stay on when it makes sense, or happy to accommodate a quicker transition. Case by case basis. ·Must have the personnel and leadership to maintain company’s core operations throughout the transition process. | ·Fully developed, capable management team that is invested in growing a business unit for several years. | 2 |
Notes:
Typical Deal Structure and Timing
| Deal Structure Topics | Notes |
| Asset or Stock Deal? | ·Company can do either, but prefers to do an asset deal. |
| Percent of Purchase | ·Outright ownership (100% of the business). |
| Seller’s Notes and Earnouts | ·The Company doesn’t usually like or tend to use Seller Notes as a financing mechanism. ·The Company will use Earnouts as a vehicle to bridge the valuation gap between what it believes the target company is currently worth and what it believes the future contingent value of the company might be. The company will use tailored earn outs that are specific to the unique components of the deal to accomplish this. |
| Length of time from LOI to PSA (deal close) | ·Usually 60 to 90 days |
About Chris Sheppard
Chris Sheppard is a Managing Director at ACT Capital Advisors. He has conducted/participated in over 20 transactions in manufacturing, ed-tech SaaS, business services, healthcare, oil and gas services, professional services, construction, building materials, warehousing and distribution, and transportation and logistics. Feel free to contact Chris at csheppard@actcapitaladvisors.com if you have any questions or inquiries. Chris’s LinkedIn
About ACT Capital Advisors
ACT Capital Advisors is a premier Mergers & Acquisitions (M&A) firm representing middle-market companies across all industries. ACT has a 30-year history of deal-making, closing 250+ transactions, and unlocking over $1.5 billion in wealth for its clients. To learn more, visit www.actcapitaladvisors.com.
