During this semester, I’ve had the privilege of working as a Search Fund Analyst for NuArc Capital. NuArc Capital is looking to acquire a small business that it can take over and actively manage. Part of my job is find and reach out to companies that we could potentially acquire. I thought I could use this project to create a story of visualizations that would be helpful to NuArc’s search for a small business. I wanted to discover, through an iterative process, what would be the best business to acquire based on the state of the market and the profile of business we’re searching for. I wanted to look at this search from a meta view to see what the best possible industry would be for purchasing a small business. To start, I wanted to compare potential sectors to inquire which would be ideal for purchase. I chose some sectors that we identified to have potential for an acquisition and then compared them using some financial variables.

For the first variable I looked at was EBIDTA/Revenue Ratio. I felt that is statistic could directly correlate to the profitability of the sector. One of the search criteria is for a business that is asset light, so a higher ratio would relate to a business that has is asset light and has more operational efficiency. A higher EBITDA/ Revenue ratio will show a company that can generate more cash flow without reliance on physical assests. You can see this show in the numbers as the sectors that consistently produce higher ratios like Operating Systems Productivty Softwate Publishing, Testing Educational Support, and Business Coaching, are sectors that don’t take a large amount of overhead, and are still shown to be quite profitable. On the other hand, sectors like Plumbers and Heating & Air-Conditioning Contractors, are very asset heavy in their line of work. This lower ratio may cause the search to steer more towards businesses that are primarily operated online and have less a reliance on physical assets. Going along with the first graph, profit margin within a sector is a direct correlation to it’s profitability. A higher profit margin will indicate a company that has higher percentage of revenue being retained as profit. It can also relate to which sectors and businesses have effective management practices with owners who understand how to consistently run a profitable business. Looking for a sector with consistently high profit margins is critical when analyzing the risk of purchasing a business. High and consistent numbers will show that a sector has the stability to persevere through economic downturns or unexpected costs.This visualization shows that despite having a solid EBITDA/Revenue ratio, the Operating Systems Productivity Software Publishing sector has erratic and sometimes negative profit margin. This raises a lot of concern when considering a sector to make a purchase in. The rest of the sectors prove to be much more consistent and stable. Business Coaching, Testing Educational Support, and Business Certification IT Schools seem to be the sectors that consistently post the highest profit margins throughout the years.

Shiny applications not supported in static R Markdown documents

Sector Financial Health Dashboard Shiny App Link

Showing the financial health by sector in a comparative way is crucial to the selection of a small business. This shiny app gives an avenue to carefully select data from 4 different variables of interest and compare the trends with other sectors. The variables Return on Assets %, Current Ratio, Debt Service Coverage Ratio, and Gross Profit Ratio, will all show valuable financial information that will help guide the process of selected a sector. Return on Assets is an important measure because it will tell how efficiently a sector is using their assets to generate profit. This especially important if the search decided to select one of the sectors such as Carpet Cleaning or Plumbers that are heavy in physical assets. Current Ratio will be a good way to analyze the sectors liquidity and it’s ability to off its short-term liabilities. I think is a valuable metric to include because it is a good gauge of the companies short-term financial health. This health is critical for the search, as the change in leadership in management could cause some financial distress in the short-term. Debt service coverage ratio was selected to show a sectors ability to repay all debt obligations and a good measure of risk. The last thing the search would want is to purchase a company that doesn’t manage their debt well. Gross Profit Ratio or Gross Margin is another good measure of profitability, specifically the core profitability without the overhead costs. I chose 5 sectors that I concluded to be viable industries based on the results from the previous charts. I felt that Business Certification IT Schools, Online Tutoring Services, Testing Educational Support, Air Purification Equipment Manufacturing, and Business Coaching post both a higher EBITDA/Revenue ratio and a higher, consistent profit margin across the years 2017-2021. When comparing the following sectors, the data shows some interesting trends. The line graphs for ROA and Gross Profit Margin clearly show that Air Purification Equipment Manufacturing is much less profitable and efficient sector. But the debt service coverage ratio data shows that Air Purification Equipment Management has become a less risky sector in recent year’s. While all sectors but online tutoring services have produced large decline in their ratios. The current ratio data fairs reasonably well for most sectors, beside online tutoring services. This is an indicator that online tutoring services as sector might have trouble with short term liabilities and could indicate some inefficient.

Now that the search has performed useful analysis on what sectors would best fit the business profile, we want to look into some of the geographical data to see where the best area to look for a prospective company would be. Based on the sector financial data, I identified Business Coaching to be one of the most attractive sectors. We now want to look at business coaching businesses across the US. I wanted to see where business businesses are making the most profit, so I decided to look into the revenue per capita by state. The revenue per capita is the amount of revenue generated from business coaching business in the state divided by the number of business coaching establishments in said state. As the data show, New Hampshire has far and away the most revenue per capita. Some other states that post high numbers are Alabama, Wisconsin, Rhode Island, and Tennessee.

Next I wanted to search what the market looked like in the year 2023 in terms of small business transactions. I wanted to paint a picture of what the potential asking price for a prospective company would be. This data gives an interactive view of the comparison of the small business transaction data in major metropolitan areas in the U.S. We are currently searching for a business that makes around 3 million in revenue. With that in mind, we would definitely want to be searching in markets on the right side of this chart. Zooming in, I was able to locate several markets that land in or near some of the states identified in the previous plot. The metropolitan areas identified would be Memphis, Minneapolis-St.Paul-Bloomington, Boston-Cambridge-Quincy, Milwaukee-Waukesha-West Allis. The median asking price for small businesses in these metropolitan areas in the year 2023 is between 350k-500k. Although this data is not specifically for business coaching, it can bring useful insight unto what the small business acquisition market looks like in major metropolitan areas.

Wisconsin Annual Growth Rate Since two of the metropolitan areas identified in the previous visual encompass a city from Wisconsin, I decided to do more analysis on the state. The following visualization shows a time-series on the growth rate percentage change in number of establishments, employees, enterprises, and amount of revenue.The data spans from 2005, to projections up to the year 2027. As you can see, some trends are clearly evident. The change in revenue remains almost constant throughout the time frame, while all the other variables remain constant. This means that the amount of business in the state is consistent, but the amount of businesses taking this revenue is diminishing. This market consolidation is an interesting trend, but does not necessarily raise red or green flags. The market consolidation may have eliminated the businesses that are producing lower revenue values then we are searching for. On the other hand, these trends could hint towards a declining market in Wisconsin, which is something we would want to stray away from for an investment we want to flourish for a long time. This data does give some useful insight, but a lot more information is needed to accept or reject Wisconsin as a possible location to search.

Shiny applications not supported in static R Markdown documents

County Financial Health Dashboard Shiny App Link The following gives an interactive view of the number of employees, establishment, amount of wages,revenue, and the percentage change of growth in each of these variables from the years 2022 to 2023. This visualization is a powerful tool that can process a large amount of data. This tool is meant to help gauge the financial health of business coaching business in the counties of the states we identified earlier. Healthier markets would entail to all of these variables being on the higher end in most scenarios. When analyzing this data, it seems clear that the changes in growth rate for all of the variables is very small, in turn making this a very minimal factor within the search. From the total amount variable data, I identified Dane County, WI, Milwaukee County, WI, and Hillsborough County, NH to be healthy markets that the search could potentially lean towards. All of these counties provide strong numbers in all of the variables that were analyzed. One factor I used when choosing these counties over counties like Jefferson County, AL or Davidson County, TN, is the proportion of revenue and establishment to employees and wages, especially for Hillsborough County, NH. This ratio that appears to be present makes a county like Hillsborough look much more efficient in their operation, as opposed to Davidson or Jefferson that clearly take on more liabilities with less revenue being accured.

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Now that the search has zoned in on some prospective areas, it’s time to start preparing to look for a business. Before we search for a business I wanted to present one more visual that can be of use when evaluating a business for purchase. The following data is extracted from closed small business transactions in 2023. The visual shows the relationship between average cash flow multiple and average revenue multiple in major U.S. metropolitan areas. The graphic provides valuable insight into the valuation of a potential business and if they’re asking for a fair price based on these multiples. These values can also hint towards opportunities for growth and value creation post-acquisition for prospective companies that post high multiples.