June 2024: The Searcher's Dilemma

The Searcher's Dilemma

As the half of the self-funded search team that decides if we want to sponsor a deal or not, I quickly learned that time is my most precious commodity. Each day, my inbox fills with Confidential Information Memorandums (CIMs), each promising the next great opportunity. But here's the catch: dive too deep into every prospect, and you'll find yourself drowning in data, losing precious months with nothing to show for it.

I needed a system - a way to rapidly separate the wheat from the chaff. That's when I turned to two key metrics that would become my north star: EBITDA and DSCR.

Picture EBITDA as the heartbeat of a business. A strong, consistent pulse above 15% tells me this company has vitality. It's generating real profit before the complexities of financial engineering come into play.

If EBITDA is the heartbeat, think of DSCR as the oxygen supply. A DSCR of at least 1.4 shows me the business can breathe easily, comfortably servicing its debt without gasping for air.

We know our subjective criteria focus on healthcare-related businesses in the Southeast with EBITDA between $500,000 and $2 million, but this is only a guide. The hard metrics of EBITDA and DSCR make everything apples to apples, allowing us to confidently pass on or move forward with a deal. By applying these metrics consistently, we ensure a fair and objective evaluation process for each opportunity.

Let me walk you through three of the fourteen deals that crossed my desk in June.

The Permit Provider (Currently Pursuing - $5.9m)

- 2021: EBITDA Margin: 15.32%, DSCR: 0.77

- 2022: EBITDA Margin: 16.77%, DSCR: 1.04

- 2023: EBITDA Margin: 16.02%, DSCR: 1.61

- 2024 (Forecasted): EBITDA Margin: 23.55%, DSCR: 3.32

Analysis: The EBITDA margins are consistently above 15%, showing a healthy profit generation. However, the DSCR trends below our threshold in 2021 and 2022, suggesting potential issues with debt servicing in those years. The forecasted improvement in 2024 is promising, so we put an IOI (Indication of Interest) in at $5.9 million.

The Healthcare SaaS (Not Pursuing)

- 2021: EBITDA Margin: -10.05%, DSCR: -0.39

- 2022: EBITDA Margin: 31.46%, DSCR: 1.21

- 2023: EBITDA Margin: 18.32%, DSCR: 0.58

Analysis: The negative EBITDA margin in 2021 and DSCR below 1.4 in 2021 and 2023 highlight significant financial instability. Despite a high EBITDA margin in 2022, the overall trend suggests this deal would be risky. It’s deals like this that are hard to walk away from because SaaS revenue is recurring. Our system quickly lets us know that this isn’t the right deal for us.

The Healthcare Staffing Agency (Currently Pursuing - $3M)

- 2021: EBITDA Margin: 18.78%, DSCR: 2.14

- 2022: EBITDA Margin: 12.80%, DSCR: 1.47

- 2023: EBITDA Margin: 24.00%, DSCR: 1.77

- 2024 (TTM): EBITDA Margin: 18.68%, DSCR: 5.51

Analysis: This company shows strong EBITDA margins consistently above 15%, with DSCR values mostly above our 1.4 threshold. The dip in 2022 requires further investigation. The 2024 metrics are based on numbers from Q1-2024, so we expect the DSCR to lower significantly.

Epiphany

After weeks of applying this system, I had an epiphany. The "romance" of each new deal - the glossy projections, the exciting market opportunities - had been clouding my judgment. By focusing on these two critical metrics, I could cut through the noise and see the true potential (or lack thereof) in each opportunity.

This approach didn't just save me time; it transformed my search. Deals that once would have consumed weeks of my life were now evaluated in hours. My pipeline became leaner, but infinitely stronger.

The Path Forward

For my fellow searchers out there, drowning in CIMs and dreaming of that perfect acquisition, I offer this advice: Find your metrics. Create your system. Let data be your guide, but never forget the story behind the numbers.

Remember, we're not just looking at balance sheets; we're searching for our future. The right deal is out there, waiting to be discovered. With EBITDA and DSCR as your compass, you'll navigate these waters with confidence, ready to seize the opportunity when it presents itself.

Moreover, being swift and precise in our evaluations ensures that we are good stewards of our investors' money. By applying this simple, metrics-driven approach, we can assure our investors that we are not only protecting their capital but also positioning ourselves to capitalize on the best opportunities available.

Happy Searching!

Christien Louviere

CEO / CoFounder

Bernard-Davis-Edge Capital