When Your Company Hits This 'Critical Mark,' Big Investors and Private Equity Will Come Calling Whether you're looking to sell or bring on bigger investors, this growth benchmark will get you in the room.
This story appears in the May 2024 issue of Entrepreneur. Subscribe »
Want to meet the people who can accelerate your growth? There's one critical revenue mark that will get you into make-or-break meetings.
"I think there's something magical about a million dollars in terms of just showing progress and scalability of the business," says Laura Held, a partner at the investment firm Shamrock Capital. She says $1 million in revenue before EBITDA — interest, taxes, depreciation, and amortization — is a noteworthy metric that puts you on the map for everyone from angel investors to debt financiers.
Marilyn Adler, a founder and managing partner at Mizzen Capital — a group that invests debt into lower middle market companies, which usually generate from $1 million to $10 million of EBITDA — says $1 million in EBITDA is the minimum a company must hit for her to even consider funding them in most cases. She says it's also usually the minimum to be of any interest to a private equity group looking for add-on acquisitions. (This is when a buyer purchases a smaller company to incorporate into an existing business — known as the platform company — in order to make it more profitable or productive.) For example, the owner of a pharmacy chain might purchase a courier company to deliver medications. "That $1 million of EBITDA seems to be a critical mark for them to spend time on it and really make it worthwhile," says Adler.
Related: 3 Ways to Know If Your Growth Strategy Is Actually Helping You Grow
To be considered for a main platform acquisition, where your company is acquired with the intention of keeping its brand and operations mostly intact, Adler says, you'd want to strive for the next unlock point of roughly $3 million to $5 million. Reaching that revenue mark (or higher) increases visibility and potential competition among private equity investors.
"As a banker, when somebody comes to me with a low EBITDA and it's a nice company, I'll say, 'Do whatever you can to try and grow the company, and let's talk in a couple of years,'" says Beatrice Mitchell, managing director of Sperry, Mitchell & Company, a boutique investment banking firm. "If you go below $3 million, there's just a whole bunch of private equity groups that won't even look at you."
All three experts agreed that private equity isn't right for every business. Much depends on a company's unique long-term vision. But if you're interested in an exit strategy, private equity can be a great way to maximize your payout.
"One thing that's really attractive about private equity is that you can get what's called the 'second bite of the apple,'" Held says. "You sell a portion of your interest in the business, but retain and roll over a really big stake alongside the investor. So you get some liquidity on day one when private equity comes in, and then when private equity is looking to sell three to five years down the road, you're participating in that event alongside them at a much higher value than when they came in. You captured all that value creation and growth in the meantime, versus just selling out completely at the onset. So that's the second bite of the apple."
The decision to work toward different unlock points is a personal one, with a variety of considerations, including how much effort you're willing to put into growth, and how badly you want a payout sooner rather than later. But regardless, making $1 million throws open doors to new and lucrative opportunities, ripe to explore when the time is right.
