PE – Early Indicators and Success Factors to Gauge Before Buying a Company

PE – Assessing Success Factors Before Acquiring a Company

When evaluating a potential investment, I focus on businesses with strong fundamentals, clear value-creation levers, and predictable, sustainable growth.

These are the key criteria that make an acquisition attractive:

Strong Leadership or Replaceable Gaps

  • Evaluating whether the management team is strong or if key leadership gaps can be easily filled with an external network of experienced executives.
  • Willing to replace leadership if necessary, ensuring the team can execute the right operational strategy effectively.

Sustainable Market Position and Competitive Moat

  • Investing in companies with clear differentiation and a defensible market position (not easily disrupted by new entrants).
  • Looking for firms in growing, resilient industries where software demand remains strong through economic cycles.

Strong Customer ROI and Mission-Critical Software

A company with high “Customer ROI” and mission-critical status is far more resilient in economic downturns, maintains strong pricing leverage, and benefits from sticky, long-term customer relationships—key factors in driving sustainable growth and value creation.

  • Prioritizing companies where the software delivers a high, measurable return on investment (ROI) for customers, ensuring strong renewal rates and pricing power.
  • Ensuring the software is mission-critical—meaning customers cannot easily replace or eliminate it without significant disruption. Focusing on solutions that are indispensable to customer operations, meaning businesses cannot function effectively without them.
  • Ensuring that the software directly improves growth, efficiency, reduces costs, or mitigates risk for customers, making it less susceptible to budget cuts.
  • Looking for companies where the ROI is quantifiable and defensible, strengthening the case for long-term customer retention and price optimization.

Quality ARR – Recurring Revenue

  • Targeting enterprise software companies with predictable, recurring revenue models (subscription-based, maintenance contracts, or deeply embedded in customer operations).

Strong Retention and High Switching Costs

  • Looking for businesses with high customer retention rates (90%+ in many cases) and strong Net Revenue Retention (NRR).
  • Prioritizing companies where customers face high switching costs, either due to deep integration into workflows, proprietary data usage, or contractual commitments.

Pricing Power and Margin Expansion Potential

  • Identifying companies with under-optimized pricing strategies (e.g., not charging based on value delivered).
  • Prioritizing businesses where structured pricing improvements, renewal uplifts, and tiered monetization strategies can significantly increase margins.

GTM Levers That Can Be Improved (Scalable Engine)

  • Ensuring the company has a proven customer base and established demand—not taking early-stage technology risks.
  • Looking for our ability to create a more repeatable, scalable go-to-market (GTM) motion, but where sales execution can be further optimized for efficiency and growth.

Operational Levers That Can Be Improved

  • Investing in companies where value creation is within control—such as salesforce efficiency, expense optimization, and automation opportunities.
  • Avoiding businesses where growth depends primarily on external market conditions rather than internal improvements.

Clear Path to EBITDA Expansion

  • Evaluating whether the company has potential for significant EBITDA growth through operational efficiencies and pricing improvements.
  • Targeting software companies where EBITDA margins can increase by at least 10–20 percentage points within a few years post-acquisition.

Scalable Technology and Low Technical Debt

  • Favoring software platforms with modern, scalable architecture, ensuring long-term sustainability.
  • Avoiding businesses with excessive technical debt that would require major, high-risk overhauls.

Potential for Add-On Acquisitions

  • Assessing whether the company can become a platform for M&A by acquiring and integrating complementary software products.
  • Prioritizing businesses where bolt-on acquisitions can increase revenue per customer, expand into adjacent markets, or accelerate growth.