Value: It’s a word with many meanings. There’s a fair market value, book value, intrinsic value, and more. In talking about your exit, the value we focus on is transferable value. Let’s look at an example.
Picture three seemingly identical companies, each engaged in moving time-sensitive freight for their customers. They all have a national presence, $2 million in EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), and about $25 million in annual revenue. It would be logical to assume that they all have about the same value.
However, one company had little value, one sold for 3.5 times its EBITDA, and one sold for 5.5 times its EBITDA. The difference in value was $3 million to $7 million to $11 million.
Neither revenue nor EBITDA alone determined the prices and terms of these deals. The keys to the differences in purchase prices were the presence (or absence) of Value Drivers and the ability of those Value Drivers to survive the owner’s departure.
Value Drivers are internal characteristics of a company that third-party buyers—especially private equity groups—look for in an acquisition. Strong Value Drivers are effective company traits that will continue to operate once the original owner departs. Consequently, those Value Drivers increase both the company’s EBITDA and the multiple of EBITDA buyers will pay for the company.
We measure the effectiveness of Value Drivers in two ways:
Think of Value Drivers as the “things” buyers are buying from you: Why would anyone want to buy your business if its continued success is dependent on you, the departing owner, rather than the Value Drivers? Buyers only pay top dollar for businesses that will not miss a beat when the original owner is no longer in charge.
Let’s look at the three aforementioned companies more closely to see exactly what motivated buyers to open their wallets or walk away.
In future posts, we’ll list 11 Value Drivers that are most important to today’s buyers. From there, we'll consider each of these Value Drivers and the reasons they are critical to transferable value.
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