What makes a company a good LBO candidate?

The most important thing is stable, predictable cash flow. The company has to cover interest and pay down a lot of debt every year, so one bad year can't be allowed to break it. I'd also want low capital expenditure and working capital needs. That way more of the EBITDA turns into cash that can go to debt. A strong market position helps too. It protects margins and makes the forecasts more reliable. Then I'd look at where the return comes from. There should be room for improvement, like cutting costs, raising prices or making add-on acquisitions. A strong management team matters here, because they're the ones who have to run the business with all that debt. The balance sheet should be clean, without much existing debt. That leaves capacity to borrow, and assets that can serve as collateral help with that.

The most important thing is stable, predictable cash flow. The company has to cover interest and pay down a lot of debt every year, so one bad year can't be allowed to break it. That points to recurring revenue, loyal customers and a business that isn't very cyclical. I'd also want low capital expenditure and working capital needs. That way more of the EBITDA turns into cash that can go to debt. A strong market position helps too. It protects margins and makes the forecasts more reliable. Then I'd look at where the return comes from. There should be room for improvement, like cutting costs, raising prices or making add-on acquisitions. A strong management team matters here, because they're the ones who have to run the business with all that debt. The balance sheet should be clean, without much existing debt. That leaves capacity to borrow, and assets that can serve as collateral help with that. Price matters as much as quality. A great business bought at too high a multiple still gives a poor return, so I'd want a reasonable entry price. And I'd want a clear exit in about five years, whether that's a sale to a strategic buyer, a sale to another sponsor, or an IPO. If I had to pick one test, it's whether the company could keep servicing its debt through a downturn.