Selling and succession

Project Palm Tree: 8 drivers of business value

3 min read

If running your business is feeling tougher than ever, you could be thinking “I’ve had enough”. The thought of sun, sand, palm trees and cocktails is obviously appealing, but to get to that point and fund the dream, the business needs to be sold. Which begs the next question …: “what’s it worth?” The answer comes from understanding the 8 drivers of business value.

1. Sales velocity.

If sales are well behind budget, worse than last year or heading in the wrong direction, buyers will probably regard the business a “do-up”. As a result, be prepared to receive a string of cheeky offers – falling sales always erodes value.

2. Free cashflow generation.

Turnover is vanity, margin is sanity, cashflow is reality. A business that is highly capital intensive and continuously consumes cash is less desirable, even if it is profitable.

3. Barriers to entry.

The harder it is for a competitor to enter your market, the more defensible your business is. Defensibility drives value as well debt capacity for growth. It also makes the business easier to buy.

4. Scale.

Generally, as the EBITDA increases so does the valuation multiplier applied. $1m, $3m and $5m EBITDA are common multiplier step up milestones. Often businesses generating larger EBITDA numbers will attract higher multiples.

5. Sustainability of earnings.

A business with a high percentage of sales that are one-off or project related is less desirable. Run rate sales orders that flow in day by day keep the flywheel spinning. If there are preferred supply or period supply contracts in place with customers that’s even better, as these provide more certainty in terms of turnover, profitability and cashflow.

6. Margin stability.

Everyone wants a business with healthy gross margins and healthy EBITDA margins. Both drive business value. If margins are tight but they are stable, there is still a good case for value. Not much scares buyers more than margins that go up and down like a yo-yo.

7. Track record.

If the business/management knows its key performance numbers and has a track record of delivering financial and non-financial targets, this drives value. Being able to demonstrate three years of consistent financial performance is gold plated. It the consistent performance includes >10% CAGR, it’s solid gold.

8. Industry fundamentals.

Candlestick makers started doing it tough after the advent of electricity. The outlook for your industry will determine both the size of the buyer pool and their appetite to invest.

If your business checks all 8 boxes then executing on “Project Palm Tree” may not be that far from your grasp. If not, what’s your business worth as it is now? Have you got access to all the levers you need to close the gap between your value expectations and what the business is worth? Or is it better to stop now and pass the baton to someone else to fix it?