Is profitability a requirement for M&A? The data says no. We monitor every acquisition of publicly traded companies. These acquisitions are large, the data is honest and accurate, and the transactions are all cash in every instance. It’s the purest data out there (private data is bullshit and full of bias). Below are our observations.
Past 7 acquisitions. Of the past 7 acquisitions, only one has generated positive EBITDA. 5 of the acquisitions were done by private equity firms, which usually are more sensitive to profitability than strategics. Two were done by strategics.
Median margin is negative. Of the 30 transactions that have happened since December 2020, the median and average EBITDA margin is -2% and -5%. All but 8 of the transactions were done by large private equity firms, which again tend to be more sensitive to net loss.
While the data is telling us you don’t need to profitable, without a doubt, you need to be growing cash efficiently. The median growth rate of these companies is 19%, which is saying something given that median revenue at the time of acquisition was $725mm. So long as you’re generating enough net new ARR for each dollar of net loss (aim for $0.67 of net new ARR for each dollar of loss, which will result in a 1.5 year payback on burn), in our view you should keep funding the growth. Clearly, M&A will be there even if you’re unprofitable, so long as you’re cash efficient.
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