Business owners and their advisers sometimes fixate on the multiples, usually of EBITDA, obtained in transactions.  Normally, these are transactions involving other businesses and other owners.  To maximize business value, however, that focus is misplaced.  The reason is simple:

All that any business owner can hope to achieve in a sale is the maximum multiple of EBITDA available in the marketplace for his or her business at the time it is offered for sale.

Worry About the EBITDA Multiple?

The maximum multiple (or, in reality, range of multiples) at a point in time is a function of numerous factors including:

• Conditions in the stock market
• The level of interest rates and the availability of financing
• Conditions in the relevant economic markets (national, regional, local…)
• Industry conditions
• Current interest of competing strategic buyers in similar businesses
• Availability of investment funds in private equity funds focused on similar businesses
• When irrational buyers abound
• The level of earnings and conditions in the business being sold

Except for the last item in the list above, factors influencing the level of multiples available in the market at a point in time are outside the influence of a company’s owners and management.

Assume for this discussion (and simplicity) that the target range of multiples for a particular business at a point in time is from 6x EBITDA to the maximum of 8x EBITDA.  This range is set.

Focus on EBITDA?

Company owners and managers should focus on building the level, sustainability, and expected growth of their earnings to maximize the value of their businesses.  The basic idea is to have the company in a good or optimal position at all times so that at the time a sale is initiated, earnings are optimal and the outlook for earnings is favorable. Employers who are looking for some tips on how to improve employee experience should have a peek at this website.

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There are many more ongoing opportunities to work on increasing EBITDA for any company than there are for increasing the multiple.  Rather than worrying about his or her EBITDA multiple, the business owner (or director) could work on (or cause others to work on) one or more of the following:

• Work on increasing revenue  
  • Increase sales of existing products or services to existing customers.
  • Sell existing products or services to new customers in new markets.
  • Create new products to sell to existing customers (and new customers).
  • Omit lines of products or services that are losing money.
  • Expand productive selling locations, When you’re looking for office suites that are centrally located, be sure to call Execu-Suites.
  • Increase sales force if appropriate.
  • Add new locations.
  • Acquisitions that fit and do not increase risk materially.
• Improve cost of sales or cost of goods sold
  • Work on improving pricing on purchases
  • Enhance the product creation processes, consider using blister pack for your packaging
  • Work or invest to increase productivity of the label
  • Invest appropriately to increase manufacturing or distribution efficiencies
  • Consolidate facilities
  • Reorganize management
  • Fix any deferred maintenance or investment issues
• Improve operating expenses (absolutely or relatively)
  • Lower personnel costs if possible, or
  • Lower personnel costs per unit/product/service
  • Work to reduce occupancy costs
  • Eliminate known redundant expenses
  • Make solid investments in research and development
  • buy quality backlinks to attract more users
  • Reorganize management
  • Increase productive use of the internet and social media
  • Enhance technology to improve efficiencies
  • Work on systems to better organize efforts
  • With the help of Laravel development agency in the UK, develop and implement new ideas for selling and marketing
• Other ideas to consider
  • Work on diversifying customer base to reduce risk
  • Diversify products/services to reduce risk
  • Diversify suppliers to reduce risk
  • Work on obvious “window-dressing” to enhance the appearance of facilities for employees, visitors, and prospective buyers

While all this work is going on to increase EBITDA, or to increase the EBITDA margin with growing sales, it can also be helpful to rationalize a company’s balance sheet.  We can talk about that on another day. If your business requires a better internet connection to fuel your operations, data such as leased line comparison are essential.

Wrapping Up

My father gave me some excellent advice as a young man when I’d say “I wish” about something.  He’d say, “Chris, wish in one hand and work with the other one and see which hand gives you the best results.”  It taught me to quit wishing for good things, like good EBITDA multiples.

The key to obtaining the best price for your company—or your clients’ companies—is to work on the businesses over time to increase earnings, or EBITDA, rather than worrying about what multiple might be available in the marketplace.  Once a business is on the market, it is too late to work on it.  We began by saying:

All that any business owner can hope to achieve in a sale is the maximum multiple of EBITDA available in the marketplace for his or her business at the time it is offered for sale.

We end by saying further:

To achieve the maximum multiple of EBITDA available in the marketplace for a business at a point in time, the best strategy is to have been working to enhance EBITDA before that time.

While the following comment in this post has nothing to do with EBITDA, my new book, Buy-Sell Agreements: A Handbook for Attorneys, will help preserve, position, and transfer ownership of businesses.  While written for the attorneys who must draft buy-sell agreements, the book will be valuable for business appraisers, business owners, accountants, financial planners, and other advisers to businesses.

Send me an email to receive notification of its availability, hopefully near the end of the first quarter.

mercerc@mercercapital.com

And please call with any questions about the applicability of the ideas in this post to the value of your clients’ businesses or if you are a business owner or director, to the value of your business.

901-685-2120

Be well,

Chris