# The Compounder Screener ## A working screen assembled from the REQ deck Not REQ's proprietary scorecard — their published process is three stages, and the criteria below are the observable proxies scattered through the deck, gathered into one place (REQ, Jul 2025, p.293). > [!abstract] REQ's own three-stage process > **Durability filter #1 — business resilience.** Seven categories, each with qualitative and quantitative checklist items. > **Durability filter #2 — people and capital allocation.** Six categories, same structure. > **Compounding — expected returns.** Reinvestment rates, returns on incremental capital, and **duration**. > The score is weighted for durability and IRR, and drives initial weighting, re-underwriting, and evaluation of changes in thesis. ## Stage 1 — Quantitative gate | Metric | Threshold | Source | | --- | --- | --- | | Deals per year | **≥ 2** small/mid deals (McKinsey's definition of programmatic) | p.43 | | Average deal size | **< 1% of group sales**; avoid targets > ~SEK 250m sales | p.220–230, p.244 | | Acquisition multiple paid | **5–8× EBIT/EBITA**, and *not drifting up* | p.231, p.244 | | Net debt / EBITDA | **1–2×, never above 2.5×** — including leases, earn-outs and minorities | p.111, p.156 | | M&A as % of FCF | **≥ 40% every year**, 80–95% cumulative over ten years | p.143 | | ROIC | **> 20%**, and holding as invested capital grows | p.238–239 | | Organic growth | **positive, and at or above peers**; ideally above GDP in the relevant geography | p.101, p.105 | | Cash conversion | **~70–90% of EBITDA** | p.237, p.264 | | EBITA margin | **stable or rising** (level matters less than direction) | p.113 | | Insider ownership | double digit; CEO stake ≫ annual compensation | p.98, p.49 | | Equity issuance | **none**, or negligible | p.196 | ## Stage 2 — Structural qualifiers - Decentralised operations, **centralised capital allocation**, lean HQ. - **In-house M&A team**; active sourcing, not broker-led. - No synergy case in the acquisition rationale. - Targets are founder-led, niche, **20–30% margins**, B2B, mission-critical, consumable/opex-linked, asset-light. - Founders retained as minority owners. - A visible **business system** with a simple profit goal — P/WC, CRI, DBS or equivalent — that a subsidiary manager can act on. - Succession by **forever-CEO or internal candidate**, never habitual external hiring. - Financial targets that are per-share or return-based, expressed over a cycle, and consistently met. ## Stage 3 — Durability, which is the whole answer Three questions, in order: 1. **How much can they reinvest?** (reinvestment rate) 2. **At what incremental return?** (ROIIC) 3. **For how long?** (duration — organisational capacity *and* the size of the target pool) Duration is the input the market gets wrong and the one you can actually research: count the SMEs in their geographies, count their acquisition team, count their business units against the 7-7-7 ceiling, and read whether they are resolving the scaling problem with *more* deals or *bigger* ones. ## Stage 4 — Run the negative screen Everything in [[Red Flags in Serial Acquirers]], particularly the disclosure and net-debt-definition tells. > [!warning] What this screen cannot see > REQ's field research on an anonymised "Company X" studied 120 subsidiaries and found sales rose post-acquisition but **EBIT did not** — of eight cohorts from 2014–2021, only two grew EBIT in absolute terms; margins fell for most cohorts; the group margin stayed flat only because each year's acquisitions came in above group margin. Unprofitable subsidiaries went from 3% of the portfolio in 2021 to **11% (13 companies)** in 2022 (p.298–302). > > None of that is visible in group accounts. Subsidiary-level analysis and CEO turnover in subsidiaries are where the real answer lives. ## Why it matters The screen exists to make the decision reproducible. Write down which line failed, and you will be able to tell in three years whether you were wrong about the company or wrong about the criterion. ## Related - [[Acquisition-Driven Compounders MOC]] - [[Red Flags in Serial Acquirers]] - [[Valuing a Compounder]] - [[Investment Thesis Plays]] - [[Technical Moat Assessment Framework]] - [[Anthony Bolton Criteria]]