Financial Performance: The Primary Driver of Your Company Valuation

Financial Performance: The Primary Driver of Your Company Valuation

Financial performance is the primary driver of your company valuation. It will be the first, and usually the most important element that a buyer will look at when valuing your business.

Why? Because your financial performance usually reflects the all-round performance of the whole business.

Above all, when it comes to selling your business at the highest possible valuation, you’ll need to show the buyer or investor that you’ve had consistent or increasing revenue and profit growth over the last few years, and you’ll also need to prove to the buyer that those revenues and profits will be sustained, or better still, continue to grow after they purchase the business.

EBITDA and The Market Valuation Multiple:

Typically, a buyer will start by looking at your EBITDA. So, it’s imperative you make this figure as strong as possible.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is a measure of a company’s profitability that excludes these non-operating expenses.

By excluding these expenses, EBITDA provides a more accurate picture of a company’s operating performance and allows the buyer to compare the profitability of different companies on a more even playing field.

The buyer will then look at your sector’s market valuation multiple – based on historic transactions or valuations of similar companies in your sector – to use as a benchmark against which to judge your performance. If you have used an independent business valuation expert, they will also take note of their suggested figure.

So how can you increase your EBITDA?

1. Increasing your revenue and sales

Find new customers, invest in growth opportunities, introduce new products and services, expand into new markets, enter strategic partnerships or alliances, and/or increase sales to existing customers.

2. Increasing your pricing

If costs go up, or if you’re not charging enough for the value you offer, increase your prices.

3. Being rigorous about expense cutting and managing expenses

Cut your costs, find economies of scale, eliminate waste, and/or increase the efficiency of your operations.

4. Reducing debt

Pay down your debt, reduce the amount of interest you pay, or refinance your debt at a lower interest rate.

5. Negotiating

Secure better rates and prices for the goods and services you use. Renegotiate any overheads or other significant costs. Renegotiate with suppliers.

6. Improving your productivity

Invest in new technology and equipment, streamline your processes, implement lean management techniques.

Nail Your Finances: Robust financial management, Reporting and Governance

But it’s not just the EBITDA figure that a buyer or investor will be interested in.

There are other financial metrics and financial reports that will determine your business’s value and it is likely a buyer will put considerable time and effort into evaluating these numbers too.

Crucially, you need to show any prospective buyer or investor that robust financial management, reporting and governance is at the heart of your business.

To maximise the value of your business, you will need to show:

> You have carried out clear and realistic financial modelling for the future and you have good cashflow which is increasing year on year.

> Your financial models have taken account of different scenarios and you have put contingencies in place to mitigate against any expected and unexpected situations.

> Your costs are not too high. Your costs and expenses (especially payroll and rent) are similar or below others in your industry.

>You are on top of your debt repayments. Or better still, have little to no debt at all.

> Your financial performance is consistent, and your revenues are consistently growing over time.

>You have healthy margins. The business is profitable, and you can reliably predict profits into the future.

> You have large gross and net margins compared to industry averages.

> Your financial ratio metrics are strong compared to averages for similar companies in your industry.

> You have good financial controls. Your processes for billing clients and recovering outstanding debts are robust.

Consistent Financial Performance is Paramount

We cannot overstate this: To increase the value of your business you must constantly push to improve your EBITDA.

You need robust financial management, and you must ensure that you benchmark your progress over time against your targets.

You should also aim to maximise your earnings in the periods leading up to putting your business on the market.

Often the best time to sell a business is when you can demonstrate consistent or improving financial performance over several years.

Here is the critical point: If you grow your business in the right way then your financial performance will be strong, you’ll be able to prove to any buyer that revenues and profits will be sustained, or better still, continue to grow after the sale, and the value of your business will skyrocket.

Download our Free 54-Page Guide: How to Seriously Increase the Value of Your Business

This article is taken from our free 54-Page Guide for Business Owners and Directors: How to Seriously Increase the Value of Your Business.

The guide will help you to get the sale value you want and deserve, and ensure that when the time comes to sell your business, your guts, drive, commitment and sacrifice will be worth it – literally.

You will also get a Valuation Scorecard to use in your own business to increase your business’s value.

Find out more about the guide and download it here.

Contact The Uncommon Practice

If you’d like to find out more how our Uncommon Strategic Advisors can help you to get the sale value you want and deserve, get in touch with us today by calling: 0333 242 3743 or tell us more about your business ambitions here.