What hurdle rate should a serial acquirer use?

Does any serial acquirer publish its hurdle rate?

Not as a single number. Constellation Software's president's letters talk about hurdle rates often, but the letters I opened give no figure. The 2015 letter (dated April 2016) says the company is using a lower hurdle rate for larger transactions but has kept its original hurdles for most acquisitions. It also says hurdle rates are "magnetic", meaning a lower rate for marginal deals pulls down the expected return on every deal ( Constellation 2015 President's Letter).

The 2016 letter (dated April 2017) describes a deal that "didn't quite meet our hurdle rate" and was lost because the company could not find an extra couple of points of IRR. It also names the main worry: management being tempted to drop hurdle rates as cash balances climb ( Constellation 2016 President's Letter).

The 2021 letter says Constellation had kept hurdle rates high for small and mid-sized software deals and would keep investing most of its free cash flow available to shareholders there at its traditional hurdle rates ( Constellation 2021 President's Letter). Other writers quote specific percentages for Constellation. I have not relied on them because I could not trace them to a filing.

What return targets do serial acquirers actually publish?

They publish results and group-level goals. The figures below are from company reports, with the year:

• Judges Scientific, 2025: return on total invested capital (ROTIC) of 17.8%, up from 16.5%. The CFO's report calls this disappointing and cites a medium-term target of 30%. The chair's statement says acquisition discipline has kept ROTIC comfortably above 15% over the group's long-term record ( Judges FY2025 results).
• Lifco, 2025: a target of above 50% return on capital employed excluding goodwill and intangibles, against an actual 132%, up from 128% in 2024 ( Lifco Annual Report 2025). I found no acquisition-level hurdle in the report.
• Constellation, 2006 to 2015: ROIC of 21%, 22%, 28%, 24%, 26%, 36%, 35%, 35%, 37% and 38%, then 31% in 2016 and 29% in 2017 ( 2015 letter, 2016 letter, 2017 letter).
• Berkshire Hathaway: a retention test rather than a rate. Retention should, over time, deliver at least $1 of market value for each $1 retained ( Berkshire Owner's Manual).

These are outcomes and group targets, not entry requirements. A group can earn 30% overall while individual deals clear a lower or higher bar.

How do you turn that into a hurdle for a small deal?

Start from the price. A hurdle is the return you need on the cash you pay, so it is easiest to read as an earnings yield: pre-tax operating profit divided by price. A 5x price is a 20% yield. A 6x price is 16.7%. An 8x price is 12.5%.

Then compare it with what the money costs. Rule of thumb, not a disclosed standard: require the after-tax yield to exceed your cost of capital by enough to absorb integration costs, a lost customer or an owner who leaves. The wider the risk, the wider the gap.

Worked example (all inputs are assumptions). A target earns $1.0M of pre-tax operating profit. Assume a 25% tax rate and debt at 9% interest, or 6.75% after tax.

• At 5x ($5.0M): 20.0% pre-tax, 15.0% after tax.
• At 6x ($6.0M): 16.7% pre-tax, 12.5% after tax.
• At 8x ($8.0M): 12.5% pre-tax, 9.4% after tax.

Against 6.75% after-tax debt, the 8x deal leaves a spread of about 2.6 points before any risk allowance. The 5x deal leaves 8.25 points. A hurdle of 15% after tax would accept only the 5x deal. A hurdle of 12% would accept 5x and 6x. Choose the number before you see the deal, then write it down.

See how to calculate DSCR for an acquisition for the lender's view of the same cash flow.

Should the hurdle change with deal size or risk?

Constellation's 2015 letter says it uses a lower hurdle rate for larger transactions, and its 2021 letter says Constellation kept hurdle rates high on small and mid-sized deals because the evidence supported doing so. The 2016 letter also reports that larger recent acquisitions earned lower returns, which weighed on ROIC ( 2016 letter).

My view is that a smaller, owner-dependent business deserves a higher hurdle, not a lower one, because one departure can remove the earnings. A large, managed business can justify a lower rate. Do not lower a hurdle because you have cash to deploy; Constellation names that as the temptation to resist.

Where these numbers come from: Constellation figures are from its president's letters for 2015, 2016 and 2021. Judges Scientific figures are from its FY2025 results announcement. Lifco figures are from its Annual and Sustainability Report 2025. Berkshire's test is from its Owner's Manual. The earnings yields and after-tax figures are the site's arithmetic on stated assumptions.

Related questions

Is 20% a standard hurdle rate for serial acquirers?

I found no filing that states 20% as a rule. Some commentators quote it. Treat any single number as a rule of thumb and set your own from your cost of capital and deal risk.

Is the hurdle an IRR or a return on capital?

Constellation's letters refer to IRR on deals and to ROIC for the group. Judges and Lifco report group return on capital. They measure different things, covered in the ROIC article.

What if no deal clears the hurdle?

Constellation's 2017 letter says it will keep its hurdle rates and build cash if capital cannot be deployed attractively. The same letter says free cash flow would be returned to investors when it cannot be reinvested.

What comes next

Once you have a hurdle, you need to measure whether the portfolio meets it: What ROIC is and why serial acquirers watch it.

Related articles

• What is ROIC (or ROTIC), and why do serial acquirers obsess over it?
• What multiple do serial acquirers really pay for small companies?
• Should a holdco pay a dividend, buy back stock or keep acquiring?
• What is the "Constellation Software model," and can it work outside software?
• What is multiple arbitrage and how do roll-ups create value?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.