Mastering the Art of the Deal: Size and Strategy in Acquisitions

Dive into Deal Sizes: What Every Entrepreneur Needs to Know

In the world of entrepreneurship through acquisition (ETA), the size of a deal can significantly shape both the journey and the outcome. Whether you’re a seasoned searcher or an acquisition entrepreneur, the balance between how much of a deal you own and how big the deal is can be a very tricky dynamic to navigate. 

Understanding "Owned" EBITDA: A Critical Metric

That’s where the concept of  "Owned EBITDA" becomes a really useful framework. This isn't just about the EBITDA reported by your target—it's about how much you own and the quality of those earnings. To calculate it, use this straightforward formula:

Owned EBITDA Formula = [% of Ownership] * [Total EBITDA]

For instance, owning 90% of a company with $1 million in EBITDA results in $900,000 of "Owned EBITDA." Conversely, a 20% stake in a company with $5 million in EBITDA gives you $1 million in "Owned EBITDA." 

The idea is simple, you can actually end up with the same or more owned EBITDA by having a smaller piece of a bigger deal. The quality of that EBITDA might also be higher, given that bigger businesses are generally less risky. 

Comparing Big Deals vs Small Deals

So which is a better path? Well, there are benefits for both options. 

Bigger Deals:

• Less Risk: Larger companies often come with established market footholds and predictable revenue streams, reducing perceived risk.

• Easier Capital Raising: It's generally simpler to secure financing for larger deals, as lenders are drawn to their stability and equity investors like bigger deals. 

• Established Management Teams: Bigger deals usually mean acquiring a company with an experienced management team, allowing you to focus on strategic oversight rather than day-to-day operations.

Smaller Deals:

• High Ownership Percentage: Smaller deals often allow for acquiring a major stake, giving you greater control over strategic directions and operations.

• Flexibility and Agility: Smaller businesses can pivot swiftly in response to market shifts, offering a significant advantage in fast-moving sectors.

• Control: Owning a bigger piece of a smaller deal lets you keep control of the business. 

Strategic Considerations for Acquisition Entrepreneurs

As you look at the “owned” EBITDA for a given deal, think about these characteristics: 

• Quality of EBITDA: A smaller slice of a larger deal might offer not only higher total EBITDA but also higher quality earnings, fostering sustainable growth.

• Financing Structure: Larger deals typically come with non-recourse financing, which can have much less downside or potential risk.

• Management Dynamics: Evaluate whether the existing team has the capacity to drive growth without your constant oversight. Bigger companies usually come with more robust management. 

Final Thoughts

Ultimately, your choice between a larger or smaller deal should align with your strategic vision and strengths. Whether you favor a smaller enterprise with a hefty ownership stake and hands-on management, or a larger entity with robust systems and a seasoned team, balance is key. Align the scale of the deal with your long-term goals and personal investment philosophy.

Hopefully this helps you get aligned around your next deal. 

-Matt 

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