Purchase Price Matters

It’s worth noting right up front that I applied to McKinsey twice: once right out of college—but, dumbly on my part, after undergraduate hiring had ended—and again two years later. I was rejected both times.

Instead, I ended up with a small team of former CEOs, CFOs and consultants inside ACS, the giant outsourcer. ACS would take over a company’s back office—IT, HR, finance—and try to move one-third offshore to make a margin. Our team often got called in to cut costs or “streamline operations.” We weren’t exactly the grim reapers or the Bobs from Office Space, but we weren’t that far off either.

Anyway, enough digression.

So perhaps I’m not impartial. But I laughed when I saw McKinsey's headline last week: “Private equity confirms a timeless principle: Purchase price matters.”

Well, duh. Thank you, Captain Obvious. I never could have realized that on my own.

Maybe it was buried in the arcane definition of MOIC—how much value you have relative to how much equity you put in.

A lot of times common sense just isn’t common.

Price is not the whole deal. But you have to get in at the right price, or every assumption about getting out at another price has to do more work.

When Darwin was running ACS, every deal—and there were a lot—came with a goal: get paid back in cash within three years. Even 22-year-old “Senior Associate Consultant” me understood the point nearly 20 years ago.

Did every deal hit that goal? Probably not. But the mantra kept us focused on cash flow and returning the cash used to buy us as soon as possible. (There was a vague promise that, after paying it back, we would somehow get to keep more of it.)

Just as important was price discipline. Take a business bought for 12x EBITDA with 6x of leverage. The buyer still has about 6x EBITDA of equity in the deal. Returning that equity in cash within three years requires cash equal to twice the original annual EBITDA—every year for three years. That’s before interest, taxes, capital expenditures, working capital and required debt amortization. The real hurdle is even higher.

They had to buy cheaply and have real plans, from the beginning, for growing the business and leveraging it across the broader organization.

To be fair, the data behind McKinsey’s obvious headline are useful. Among 2018–2023 buyout vintages, buyers in the lowest-price quartile produced 3.4x MOIC versus 2.7x in the highest-price quartile. Among the top performers, the gap was 5.5x versus 3.6x.

No surprise: better-performing buyers tend to buy at reasonable prices and do real operational work to support the businesses they’ve bought.

Purchase price isn’t everything. But it determines how much else has to go right.