When valuing a company, it is common knowledge that the valuation derived is calculated by Profit x Multiple. It is widely assumed that M is market driven, but this has been disproved. While all industries have a benchmark, M in the Profit x Multiple calculation can be optimised by:
- mitigating business risks and
- exploiting “growth accelerators”.
Business risks
The main areas where businesses have risks that drive down M are:
- systems and processes
- balance sheet
- income statement
- management structure
- market factors
If a business can improve these factors, M increases and drives a higher valuation.
Growth accelerators
Growth accelerators positively impact M. These include:
- people and organisation
- routes to market
- products and IP
- positioning
- scalability
Strengthening these factors will help increase a company’s M value. This method means that comparable transactions are paramount, as these will set the range for the valuation multiple to be achieved. If a highly sophisticated business is sold at 12X EBITDA, then this will set the top of the range making it a benchmark company.
If at the other end of the scale a company with a high level of business risk attracts a valuation of 4X EBITDA, then this will become the benchmark for the lower end of the spectrum.
A business can therefore benchmark itself against other similar companies in its sector that have commanded high valuation multiples. This will give the business the tools to identify where improvements can be made in order to increase its M. Based on its many years of experience in selling entrepreneurial companies,
Some consultants developed a service called ”Equity Acceleration Plan” to determine the optimum path for a company to maximise its opportunities, minimise its risks and influence positively the multiple achieved on sale.
At OCH Group we know as experts how to do your business stronger and maximize your opportunities. So consult us if you are interested in improving your chances of increasing the value of your company.
From:
- Dolf Campman, FYI–GGI News Nr1 Autumn 2021
