Our Business Diagnostic is how we identify opportunities
We begin by reviewing your business with the eyes of a potential buyer, identifying distinctiveness & vulnerabilities. We view your business from the fundamental framework of the “Business Value Equation” which is how most private equity buyers frame the value of businesses that they invest in. The Business Value Equation is defined by three core drivers:
(e.g., Enterprise Value = Revenue * EBITDA margin * EBITDA multiple)1
This is a simple equation but leads to powerful implications when analyzing the value of one’s business. For the revenue lever, it is important to understand overall revenue growth, participation in various business segments (defined by geography, channel, product, etc.) and, critically, the rate of growth across these segments and overall. Fast growing companies are more valuable, particularly if that growth comes with sustainable margins.
For the EBITDA margin lever, higher margins are obviously more valuable than lower margins, but what is more important from the standpoint of value is how sustainable those margins are. It is critical for the business owner to understand why margins are what they are and what forces will tend to improve or reduce them.
For the EBITDA multiple lever, this is really driven by three factors: the attractiveness of the business’ growth trajectory, the sustainability of its EBITDA margins and the level of risk associated with the business. “Annuity” like businesses earn higher multiples vs. cyclical commodity businesses earn lower multiples.
We analyze your business overall, key segments, and key capabilities and we assess all these factors to determine areas of distinctiveness and sources of vulnerability. We then determine what are the primary drivers that affect the value of your business and consider the levers that you can pull to improve upon those drivers.
EBITDA = Earnings before interest, taxes, depreciation, and amortization
EBITDA margin – EBITDA / Revenue
EBITDA multiple = Enterprise value / EBITDA
Enterprise value = The value of your business on a debt free basis, including the normalize amount of working capital needed to run the business
Equity value = The value available to the owner when they sell (which is Enterprise value less net debt)