The Evaluation Framework
Professional capital allocators evaluate acquisitions using a structured framework. This is not emotional. This is not gut feel. This is systematic evaluation against specific criteria. Understanding these criteria transforms acquisition decision-making from gambling into disciplined analysis.
The Core Criteria
- Positive net income: Profitable businesses, not turnarounds or R&D plays
- Recurring revenue: Predictable cash flows, not one-time contracts
- Owner-operator: Can survive without founder, transferable business
- Scalable margins: Can grow revenue without proportional cost growth
- Clear competitive advantage: Defensible market position
- Reasonable valuation: Purchase price < 5x EBITDA for mature businesses
- Operational improvement potential: Clear path to 20%+ EBITDA improvement
The Red Flags
Avoid businesses with: concentrated customer base (80%+ revenue from one customer), key person dependency (owner's departure kills business), declining revenue or margins, high customer acquisition cost without customer lifetime value, emerging competition without differentiation, or uncertain regulatory environment.
The Valuation Math
Never pay on projected returns. Always value based on current cash flows with conservative adjustments. If a business generates R1M EBITDA, fair value is R3-5M depending on growth profile. If seller wants R10M, either wait for market correction or move to next opportunity.
Professional capital allocators turn down 99 acquisitions to make 1 that meets criteria. Patience is the competitive advantage.