What makes a good LBO candidate?

In an LBO the buyer funds a large part of the price with debt, so the first thing I look for is cash flow that can support that debt: stable, recurring revenue and predictable margins. A business with long-term contracts or subscription revenue is better than one whose earnings swing with commodity prices.

Second, the cash has to be available. Low capital expenditure and modest working capital needs mean more free cash flow goes to paying down debt, which builds equity value. A strong market position helps margins hold up in a recession, when the debt is most dangerous. Hard assets can also help, since lenders lend more against collateral.

Third, there should be room to improve. Private equity returns come from growing EBITDA, so I want identifiable levers: cost savings, pricing, expansion or add-on acquisitions in a fragmented market. And the deal has to make sense financially: a reasonable entry multiple, a management team that can execute, and a believable exit, whether a sale to a strategic buyer, another sponsor or an IPO, after a typical holding period of several years.