In the March 2014 edition of Mergers & Acquisition magazine there was a quote that compared public companies and Private Equity Groups. It was, “Our experience is that PE firms tend to have a different focus than publicly traded companies. For PE firms, cash flow, EBITDA, and low cap ex are very important.”
Let’s translate the above for small business and our personal lives. It’s like, “Well duh!” These things are very important in most peoples’ day-to-day lives.
- Cash flow – one of my rules for both business buyers and sellers is, “Cash (and cash flow) is King.” Small businesses need timely cash flow. We have to pay our people this week so it helps if our customers pay us in a timely manner. The same at home; if a client or employer doesn’t pay us on time we can’t call the bank and ask them to a free pass to pay the mortgage until we get paid.
- EBITDA – let’s concentrate on the “E” (earnings). Our businesses and our households need earnings. The more we have, the better our life can be (we’re assuming we aren’t sacrificing our soul to get those earnings).
- Low Cap Ex – Capital expenditures are necessary to keep our business and our home running efficiently. There are a lot of things we could enjoy significantly more than having to prematurely replace a machine, a truck, a refrigerator or a plumbing system. In my world of buy-sell deals, buyers expect everything to be in proper working order and properly maintained or licensed (in the case of software). We properly maintain things so we can use that money for a trip, tuition or our IRA.
“I intend to live forever or die trying.” Groucho Marx