Four Key Factors That Can Boost Your Business Valuation Multiples

Once you’ve made the decision to sell your business and walk away from the enterprise you’ve worked so hard to make a success, one of the most difficult dynamics is balancing preparation for a successful sale and an advantageous sale price with a focus on ongoing operations. In other words, what can business owners do to bolster the potential sale price while maintaining quality operational results? Can you keep your eyes on the ball while improving your swing?

Working with an expert sell-side advisor to better understand business valuation methods and how they relate to sale price is important. Digging deeper into the details of business valuations and how financial results affect them is key. Here’s a primer.

Multiples in Valuation: The Market-Based Approach

In common parlance, when business owners and their advisors discuss the work they are doing for the sale of a company, they often discuss where the company’s “multiples” stand and where they can be improved. Multiples, in this sense, reflect the two most common methods of comparing a company’s financial results to similar enterprises in their sector.

Comparable Company Analysis

The first of these common valuation methods is Comparable Company Analysis (“CCA”). This approach compares financial characteristics from similar businesses in the same market sector.

Earnings comparison is a common way to establish “Enterprise Value”, or “EV”, which is assessed in relation to EBITDA. In order to establish a company’s “EV/EBITDA ratio”, advisors will multiply the EBITDA of the business being sold times the EBITDA multiple from comparable companies in their market. There are other financial characteristics of companies that advisors use to establish EV other than earnings, and each calculation type uses essentially the same comparative process.

Comparable Transaction Analysis

The second common market-based valuation method is Comparable Transaction Analysis (“CTA”). Rather than comparing financial results of comparable companies in the case of CCA, CTA examines actual sale prices of similar companies in past M&A deals. It provides market-based insight into what buyers have been willing to pay for similar businesses.

In both CCA and CTA, the accuracy and applicability of comparisons require detailed understanding of the markets and sectors. This is where the expertise of experienced sell-side advisors is absolutely essential for navigating what appears on its face to be purely a quantitative process. For a more thorough explanation of how company valuation works, see How Sell-Side M&A Advisors Help Owners Understand and Defend Valuation.

4 Factors to Improve Multiples for Better Valuation Results

Here are four key factors that can greatly improve valuation multiples for your company.

1. Invest in Scalability to Drive Premium Offers

Given the focus of strategic investors on scalability, capital investments that generate future earnings growth are very attractive to potential buyers. Beyond the simple financial upside of scalability, deliberate focus on future earnings growth in this way generates a great deal of confidence among buyers that the sellers have done the hard work of preparing the company for the future, making it more likely that strong company valuations will lead to advantageous pricing.

2. A History of Well-Prepared Financials

An established track record of accurate, GAAP compliant, professionally prepared financial statements go a long way to generate meaningful confidence in company ownership and management among potential buyers. Making the effort throughout the lifespan of a business to consistently produce reliable and detailed financials is advantageous for a long list of reasons. Beyond paving the way for successful sale transactions, it can help tell your story to potential buyers and certainly improves company valuation multiples.

3. Customer Concentration

Demonstrating consistent growth in revenue from new customers and not merely existing ones is a detail about company growth that is particularly attractive to potential buyers. Reduced customer concentration, especially in comparison to competitors, reduces perceived risk, increases buyer confidence in future revenue flows, and can dramatically impact valuation multiples.

4. A Skilled and Tenured Management Team

One of the highest compliments for the way in which an enterprise has been led is the presence of a stable, highly skilled management team capable of successfully guiding it independent of ownership. Easily understood organizational charts showing defined roles of staff, clearly defined operational decision-making authority, and valuable institutional memory through all layers of management are clear signs to potential buyers that a business will be worth paying a premium to acquire.

Whether helping you develop a detailed understanding of the sale process, preparing your business for it, successfully bringing your company to market, or helping position your enterprise for a successful future, Optima Mergers & Acquisitions specializes in guiding business owners through every step of the sale process. Our experience and diligence, help our clients achieve better outcomes and protect the legacy they’ve built.

Contact our team to start a confidential conversation today!