What Drives Your Business Value?
By Jay Carter
It’s important to understand what a business is worth, and it’s equally important to understand what drives the value of the business, and it’s not all about EBITDA. I valued a food manufacturing business recently that was worth 5 X EBITDA. Two weeks later, I valued another food manufacturing business that was similar in size. It was worth 9 X EBITDA. Why such a big difference?
EBITDA is only one indicator of value. My “5X” client had a good, stable business that manufactures organic fruit pies and incredible scratch-made cakes. The business is well known in the area and has a strong and loyal customer base. With sales of $19 million per year, this business generated $2.1 in EBITDA, resulting in a valuation of $10.5 million. Nice business!
My “9X” client looked similar on the surface. This business also produces baked goods. Theirs were made from organic and non-GMO ingredients, a number of which were gluten-free. While not precisely the same products as the 5X client, they are not that different. In fact, the two companies’ gross profit margins were almost identical. But the 9X client was valued at (and subsequently sold for) $17.5 million! How can we explain that?
The difference was that the 9X business had more things going for it than buyers’ value, and the valuation multiple reflected it. Comparing the two side-by-side, the distinctions are clear.
Both clients built great businesses, but the 9X client was very strategic in how they grew. The 5X client tended to respond to growth opportunities as they showed up. The 9X client knew in advance that buyers of businesses like theirs valued product and customer diversification, strong sales growth, and a solid management team. The 5X owners worked just as hard and produced equivalent sales and EBITDA, but they overlooked other important drivers of value for buyers in the industry.
My friend Jeffrey Slater at The Marketing Sage says this about building value with a well-developed and executed marketing strategy,
“When you understand what a potential acquirer of business values, it focuses your marketing investment. If you are thinking of selling a business in the coming years, and acquirers will pay a higher multiple for businesses with greater customer retention, brand awareness, or lower CAC, focusing your marketing tactics to achieve those goals makes sense. Invest marketing dollars wisely so they provide the greatest return.”
Grow your business with that buyer in mind. They are your ultimate customer. Build what they want and receive a premium valuation.
Jay Carter is a pre-exit merger and acquisition advisor, empowering business owners with the knowledge and strategies they need to increase both value and saleability of their business.
Reach Jay at jcarter@market-view.com or 704-904-7543.
#businessvaluation #mergersandacquisitions #exitplanning #market-view #jeffreyslater