The 9 Abilities - Maximize the Value of Your Business

Value is typically expressed as a simple multiple of EBITDA (earnings before interest, taxes, depreciation and amortization).  We have written a lot about EBITDA and how best to position it, but for this Insights, we shift our attention to the multiple and how owners can drive valuation higher.
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A Starting Point: To determine value, investors review valuation metrics (multiples) for relevant public companies, analyze recent transactions in the industry and create a detailed discounted cash flow model. Each of these methods have their flaws, but at least they result in determining a reasonable range of potential transaction values.  These data points, however, are only the starting point for a robust valuation discussion.    It is common that two companies, in the same industry, with the same basic financial profile can trade at dramatically different valuations so how can owners move the value of your business from the bottom of that range to the top (or even above it)?

Diving Deeper:   We have found over hundreds of transactions, through multiple economic cycles (and nine presidential elections), that there are a handful of core areas that ‘move the needle’ and improve enterprise values from the bottom of that reasonable range to the top of the range or even beyond it.
To maximize value, the company must prove that it has real “ABILITIES”:

• Profitability – Prove you are better than others
  • Does the company have above average margins?  Why?
  • Are there opportunities to further improve margins? 
  • Are there key risks to maintaining those margins?
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• Defendability – Keep an edge against the competition:
  • What is the company’s true points of differentiation?
  • Does the company have a “moat” around the business? 
  • Is there significant intellectual property to limit competition?
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• Repeatability – Put the business on auto-pilot
  • Is revenue recurring, re-occurring or contracted?
  • Does the company have documented repeatable processes? 
  • Has the company invested in systems and automation?
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• Scalability – Maintain a focus on growth
  • Can the company double quickly?
  • Does the company have the right infrastructure for growth? 
  • Does it have the right people in place?
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• Transferability – Focus on the future, not the past
  • Will the company continue to thrive if there is a new owner? 
  • Will customer relations stay with the company or go with the owner? 
  • What opportunities exist for the future owner to enhance value?
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• Manageability – Invest in great management teams
  • Does management have the credibility and experience to run the company?
  • Will the team remain post closing and work with the new owner? 
  • Is decision making concentrated or allocated throughout management?
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• Leverageability  - Enhance equity returns by borrowing prudently
  • Can the company handle a reasonable level of debt and still invest in growth? 
  • Is there sufficient assets for collateral and cash flow to support repayment?   
  • Does management have experience managing a levered balance sheet?
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• Dependability – Prove that the company will continue to deliver results
  • Are there concentration risks of customers / products / suppliers, etc?
  • Will the company thrive through economic or election cycles?
  • Will the demand in target end markets continue to be robust?
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• Salability – Demonstrate that there be an exit opportunity 
  • How can value be enhanced in 3-7 years? 
  • Who would invest in the company next?  Why?
  • What will the transaction environment look like at that point?

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The company will not only attract more interest from potential buyers but also command a premium valuation by mastering these "abilities" before entering the marketplace.  By highlighting the positives and addressing concerns around these core areas, CMG has been able to consistently exceed sellers' valuation expectations.  
 
Whether you are considering an exit in the near-term or are just curious to learn more, we would love to connect, learn more about your company and truly understand your objectives. We can certainly share our insights on the market and help you consider strategic options for you and the legacy of your business. Contact us here

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