Would You Take Flyer on This?

Went to look at a company last week.  Decent business with $12MM in revenue in the personnel placement space – health care industry.  Problem is that the balance sheet is “upside down” – meaning that liabilities are greater than assets.  What happened?  The owner was cash rich and invested in Florida real estate and invested and so forth.  And we know how that story ended.

So here are the particuliars – about $600,000 in EBITDA, $2.2MM in AR, bank loan of $2.5MM, receivable from the owner of $1.5MM.  One could argue the conpany is worth 4X EBITDA or $2.4MM.  But revenue has been slightly down, a large piece of the business – almost half resides with one individual and in truth when one looks at EBITDA remember thats before interest.  In a company with poor working capital throughput – meaning the AR is slow to collect (ie hospitals) and personnel are paid weekly — then interest is an issue.

So for this company the interest should be deduected from EBITDA – so is cash flow really $400,000 whcih would be ($2MM loan @ 10% = $200,000 in interest such that $600,000 – $200,000 = $400,000).  And secondly the owner wants to stay on and I have to question his business acumen having blown $1.5MM on multiple FL properties.

So I think we will pass.

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4 Responses to Would You Take Flyer on This?

  1. Ken says:

    Donsrons –

    I stumbled across your blog this morning, read through every article, and subscribed with the hope you’d start to blog someday. Look at my fortune :)

    While admittedly I have no experience acquiring companies, your last sentence sounds like the deal breaker. During your diligence process, how do you evaluate leadership and the talent within the company? How much weight do you give these factors in relation to the financial picture?

    Look forward to reading more.

    Ken

    • donsrons says:

      Ken,
      Talent holds as much weight as the financial factors. If you buy a business and there are key people that you must rely on then thats speaks for itself. If you buy a business and most of the talent resides with the seller and he he set to retire – and you are unfamiliar with the business – that is a problem. What we have done is make sure that the sellers or key individuals have been locked into the company. Bottom line is that you cannot lose key people and these people must be able to operate the business in the absence of the owner – a tall order as most small business owners are control freaks. Hence, talant is just as important as the financial picture.

  2. Supermoves says:

    God, this blog might be the best peice of reading on the Internet. Thanks in advance for making me spend hours reading and replying :-)

    Putting aside the numbers for a moment, with all the business opportunities available, I’m not sure that a personnel placement firm is a smart choice in an ailing economy. Though healthcare is still a growing sector, signs are not yet pointing to any recovery. If you were going to “take a flyer” on a company like this, I think you’d be better off to wait for the upswing in the economy to start.

    Plus, so much in the recruiting space is based on talent that you wouldnt want to take on a venture like this without some experience in the space (at least I wouldn’t).

    • donsrons says:

      Gee – thats the nicest thing anyone has said to be all day – I mean week – or is it the whole month. But in all seriousness – you actually get the point of the blog – down and dirty – real insights – non esoteric.

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