There are many factors the C-suite must consider when it’s time to sell the business. While profitability and growth potential will always be key drivers for maximizing value, there are other factors that sellers should focus on to receive top dollar. Because the ultimate price is the product of two important criteria—the level of sustainable cash flows and the risk-adjusted expected rate of return—sellers should think about maximizing cash flows while minimizing their risk. Sellers often use EBITDA as a proxy for cash flow, and most do a good job of maximizing EBITDA by improving efficiency and margins, growing sales and reducing or delaying expenses. But not many, however, are effective at enhancing the multiple or reducing their risk, which can have an even bigger impact on value.
The key to growing a multiple lies in understanding the underlying factors impacting value that may not be identified in the standard valuation process, taking steps to directly address those factors, charting a course for growth and setting yourself apart from the competition. Over the course of three posts we will break down useful tips for understanding business value enhancement, beginning with summarizing the key factors impacting your business value.
Key Factors Impacting Business Value
A business’s value is not limited to traditional metrics like EBITDA or earnings. There are also many other factors that tell buyers whether your company is worth the asking price.
Past performance. When considering business value enhancement, it’s important to understand how past performance can influence and predict the future. Examine historical financial statements as well as product pricing and market data—and identify trends that may resurface in the future. Recognizing these trends helps increase predictable revenue streams, which builds buyer confidence. This is critical because the value of the any business or asset is based upon the present value of future economic benefits.
Data trends. In addition to historic performance, sellers should look closely at the trends shaping the future of their business. Demographic data, changes to customer behavior, weather patterns and economic forecasting can inform the likely trajectory of a business’s earnings and be used to build confidence in a projected revenue stream.
For example, consider a business that focuses on providing services to aging baby boomers. The numbers and buying behaviors of the demographic can be reliably predicted for many years to come, thereby providing a buyer with greater confidence that revenue projections based on this data are dependable and realistic.
Accounting policies. These can also have a substantial impact on profitability and a company’s value, which makes it critical that a seller’s accounting procedures reflect the true profitability of the business. For example, if a company spends a significant amount on computer software and expenses it, that depresses profitability. But if the company were to capitalize and amortize it, profitability would be enhanced which could have a material impact on EBITDA and value.
Stay tuned for our next post where we discuss how to increase business value.
Larry Goddard is a principal and practice leader in the management consulting practice at BDO USA, LLP. Larry has more than 30 years of management and advisory experience, helping hundreds of organizations throughout North America improve performance. He advises clients on strategic planning, operational and profitability improvement, turnarounds, bankruptcy, workouts, business restructuring and growth.
Larry Goddard, CTP
Management Consulting Principal, BDO USA, LLP
32125 Solon Road Cleveland, OH 44139
Dr. Tami Bolder is a Senior Manager in the Cleveland office of BDO Consulting and supports the Valuation and Business Analytics practice. She has over 12 years of experience performing business valuations for various purposes, including estate and income tax planning, litigation and marital dissolutions, as well as providing litigation services for multiple purposes such as wrongful death, fraud and breach-of-contract cases. Tami is currently focused on expanding BDO’s Healthcare Valuation practice, and she is one of 40 professionals nationwide who has successfully completed the American Society of Appraisers’ Multidisciplinary Advanced Education in Healthcare Valuation Program.
Tami Bolder, CPA, ABV, ASA, MBA, DBA
Consulting Senior Manager, BDO USA, LLP
BDO Cleveland - Solon Road Office