One Tweak That Can Add Value to Your Business
If you are trying to figure out what your business might be worth, it is helpful to consider what acquirers are paying for companies like yours these days.
A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, or Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
Obsessing Over Your Multiple
This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $5MM in EBITDA, and it trades for four times EBITDA, it is worth $20MM; if the same business trades for eight times EBITDA, it is worth $40MM.
Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.
How Profitability Is Open to Interpretation
Most entrepreneurs think of EBITDA as an objective measure, calculated by an accountant, but when it comes to the sale of your business, EBITDA is far from objective. Your EBITDA will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.
Let us take a simple example to illustrate. Imagine you run a company with $30MM in revenue and you pay yourself a salary of $300,000 a year. Further, let us assume you could get a competent manager to run your business as a division of an acquirer for $180,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $120,000 in EBITDA. If they are paying you five times EBITDA for your business, that one adjustment has the potential to earn you an extra $600,000.
You should be able to make a case for several adjustments that will boost your EBITDA and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.
Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.
Contact Whitehorn today to find out how we can help you add more value to your business.
