Want to know a secret?
I pass on any deal with a 25%+ net margin.
I'm not buying Facebook here. These are brick-and-mortar SMBs. In my experience, they make 5-15% profit margins.
Anyone doing significantly above that is either:
A. Full of shit
B. Way better at operating than we are.
C. Operating with efficiencies that will disappear within 60 days of the closing. (This is the most likely answer)
The two biggest culprits of C:
Employees are earning less than the market rate due to loyalty to the founder.
The founder is doing multiple jobs which will cost a lot to replace, or you will need to do them and you just bought yourself a job.
When you are penciling in your deal, if that equation is counting on above 20% net margins, and you are not investing in tech or a service job where you can slide directly into the founder’s shoes and operate the business, you should be careful.