Expanding EBITDA Margins in an ETA Business?
Jacob Thomas, Jeff Stevens, A. J. Wasserstein. (2025)
Don't Expect It, but Don't Lose Hope, Either. Yale Case, no number printed, June 23, 2025
Sample. "A prominent search fund investor who has navigated the ETA jungle for several decades as both an entrepreneur and investor kindly shared with us a dataset consisting of 44 operating company observation points, each with at least three years of post-acquisition revenue and EBITDA" (p2), plus two pre-acquisition years and the margin forecasts in each deal's CIM. Balance sheet data for 33 firms; 33 exits (not necessarily the same 33). Investor not named (co-author Jeff Stevens is identified in an endnote as founder of Anacapa Partners, but the note does not say the data are his). Included and excluded. One investor's portfolio; companies with under three post-acquisition years are excluded, which drops early failures and fast exits; traditional versus self-funded not stated. Headline numbers. "After analyzing financial results from 44 search fund-acquired firms, we did not observe an increase in average EBITDA margins over time." (p1). Forecast: "post-acquisition margins are expected to rise substantially, by approximately 6% of sales ... Only 9 of the 44 firms in our dataset predict a decline in margins" (p4). Actual: "Instead of increasing by 6% of sales, margins actually decline by approximately 10% ... Only 12 out of 44 firms show an increase in margins" (p5). "There is no evidence of a J-curve; instead, there is an L-curve." (p6). "the average entry valuation was 6.0x, while the average exit EBITDA multiple was 14x." (p12). Limits. Authors: "While it is certainly not comprehensive, we believe our analysis is directionally valid." (p2); later-year results are less reliable because winners exit. Reader's notes: no statistical tests; the 6%, 10% and 16% figures are deviations from each firm's own lifetime-average margin in points of sales, not raw margin levels; the claim that CEOs "consciously gave up margins" for asset turnover is asserted, the data show co-movement only.