“A friend of mine got 6X on his business, then I should at least get that.” The common knowledge with businesses turning over $1MM EBITDA may trade for five times or more. Reality says otherwise! No two businesses in the same industry, even in the same market, posting the same $1MM EBITDA doesn’t mean they’ll command equivalent offers.

When a proper process is run and multiple offers are received, we can prove with facts and passion that valuations may vary as much as +/- 50% on a particular opportunity. There are so many factors justifying the spread. A company worth $50MM could be worth as low as $25MM and top out at $75MM depending on how it fits within the buyer’s portfolio, their strategic vision, and their growth opportunities.

Valuation is primarily a component of the perception of risk and it’s very important to objectively look at your business as if you were a buyer and then address those areas most buyers perceive as unfavorable. If your goal is to ultimately sell your business, changing your mindset from ‘this is my life’s work’ to ‘I have a profitable transferable asset’ is tremendously important to view it from an outsider’s perspective. Oftentimes the adjustments in processes you’re making to improve your business are the same things that are going to make it operate better thus generating more revenue and profit and help you sleep better at night.

A common analogy is a real estate transaction that people deal with day in and day out. There’s two 4000sf homes in a desirable zip code, in the same desirable neighborhood and will draw vastly different prices in the open market. There are absolute, quantifiable reasons for the two different homes commanding their price. Comps and dollar per square foot are only two factors as there’re dozens of intangibles at play influencing what the price per square foot would be. The objective quantitative EBITDA metric is a primary component for businesses. For homes, the price per square foot is subjective as there’s dozens of factors, some exact and others are not, such as age, days on market, what’s been updated, renovated, replaced, etc. all affect the price per square foot.

“The better business cases originate with owners who understand they’re playing their own game and no one else’s. They understand their value avoiding country club valuations.” – David Reed, Managing Partner

In the universe of homebuyers, they’re looking to answer the question, “Will we have to invest $100,000 into this home to update the kitchen just so we can host Thanksgiving?” Buyers of businesses are assessing the same thing; how much will we have to invest in this asset to bring it up to par, to position it within our platform, etc. We get it, your buddy got 8X, 9X maybe 11X, or the guy you play golf with on Wednesday got 10X on his business. Just because two businesses are making the same amount of EBITDA does not mean they should or will be valued the same. There’s subjective and objective data to assess and evaluate.

If multiples are not black and white, then why do buyers use them? Great question! In the lower middle market ($15MM – $150MM). The reason buyers use them is because it’s an objective way when you’re at LOI to assess the value prior to entering financial diligence. Think of the LOI stage as the ‘ticket to play’ and confirmatory due diligence as the ‘ticket to stay.’ Numbers move around during a business case, they’re fluid, and it’s good for both buyers and seller to be on the same page about how the business is valued. It’s easy to say it’s a five or six multiple to serve as guardrails.

In assessing your business, we listen intently, give you an honest answer of what your business may be worth, why we believe that and what you can expect from a sales process to achieve your goals and objectives. We think your business is worth X because we look at comparable transactions. We always express an estimate as a range because we know buyers will assess any asset differently based on their investment criteria, validation of their investment thesis, investment committee directives, e.g., add-on’s, geographical footprint and hundreds of other components. Our job as sell side advisors is to find the right buyer for your asset who’s willing to place a premium on the business and potentially pay a higher multiple.

The last thing you want to experience is accept an LOI and endure the frustrations of your EBITDA being beaten down through diligence from $1MM to $750,000 to $500,000 or worse case the deal falls apart altogether. The quality of financials, the quality of processes, the leadership team, tenure of employees, all of it is incredibly important. What’s the answer? Here’s 3 ways to improve your value on your own.

3 Ways to Improve Value

One. The single easiest way to improve the value of your company is to terminate your CPA. Unless you absolutely love them, they must go! You’re not eliminating their role entirely. What you need is a finance professional who will invest time in your business instead of preparing month-end, quarterlies and tax planning. A fractional CFO will help you be more strategic on your financials. We say fire them, because getting your financial house in order is Step Zero in preparing for a sales process. Subscribe to accrual based accounting according to GAAP adds value in a sales process. While we often hear, ‘I know my numbers, my books are clean. I know I’m making serious money.’ <insert eye roll here>.

It makes no difference to me or my peers, but it sure as hell does to the universe of buyers. Sure you pay attention to your bank account at the start and end of each month, but it’s not the right way to operate a profitable business THAT CAN SELL ANYTIME regardless of any circumstance. If your ultimate goal is to exit at a maximum valuation, becoming more strategic on your financials has a tremendous amount of value. We’re not beating owners up, but what we see day-in day-out is a more realistic picture of you’re neither ready nor prepared. Within your business understanding building KPI’s around your financials with the assistance of an experienced business-selling CPA or a fractional CFO is one step.

Two. The second easiest method for increasing the value of a company is securing a solid leadership team. Whether that’s build, buy or borrow, inserting a well thought out management team responsible for daily operating leadership is vital. As the owner, you need to step away from day-in, day-out responsibilities delegating to a management team. Yes, it’s difficult to do physically and emotionally. Changing your mindset of a business owner to a business seller must occur as your business is now a cash flow producing asset and not your life’s work anymore. Buyers are assessing your business as a cash producing asset! When buyers see a solid leadership team they’re willing to pay for your opportunity over those sellers who haven’t.

Three. The third method is a business that has current technology platform(s). Businesses with technological debt start off behind the eight-ball requiring the buyer to invest additional resources just to get to status quo. One of our sector expertise – residential service businesses – often requires sellers to have a field service-based CRM that homogenizes front- and back-office.  Technology like that really goes a long way in the transaction because it shows buyers you’re serious about increasing top-line and optimizing bottom line.

These three recommendations are uniquely aligned with most PEGs playbooks and you can strategically lead these initiatives on your own with minimal investment. We’ve advised, led or integrated over 100 transactions and we know what they like and don’t like in transactions. When you’re able to anticipate and predict what the buyer is seeking, then you will command a premium purchase price. You’ve built out the foundation, so they don’t have to. It becomes easier and faster for the PEG to generate favorable returns for their investors.

Tying a bow on valuations, it is more than a numbers game, and it’s more important to understand there’s a lot of intangibles about your business to be worked on and improved upon. A day in and day out focus will have a meaningful impact when it comes to time to exit your business.