Is profitability a requirement for M&A? Perhaps. 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 15 acquisitions. Of the past 15 acquisitions that we would consider non-distressed, which go back to July 2023, only 5 did not generate positive EBITDA. That means 67% of the companies were profitable and 33% were not. The median EBITDA margin of the past 15 acquisitions is 10%.
All acquisitions since December 2020. If we look at all 37 acquisitions since December 2020 that we would consider non-distressed, 17 of them did not have positive EBITDA, meaning 55% were profitable and 45% were unprofitable. Additionally the EBITDA margin was 6% on median.
In summary, a larger portion of the more recent acquisitions are showing profitability (67% vs 55%), and the median EBITDA margin of the more recent acquisitions is higher (10% vs 6%). All that said, the data does show that cash burning businesses can still get acquired (after all, 33% of the last 15 acquisitions were unprofitable) and cash break-even seems to be good enough; no need to sacrifice growth for 20%+ margins.
So long as you’re generating enough net new ARR for each dollar of net loss (aim for $0.70+ 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. M&A will be there even if you’re unprofitable, so long as you’re cash efficient.
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