Author: Mark Spickett
There are three metrics for both public and private Middle Market companies that drive acquisition value:
1. Growth – Historical revenue growth trajectory and consistency of growth.
2. Earnings – Acquiring companies buy streams of cash flows/profits.
3. Size – The larger the firm the better (more reliable cash flows/less perceived risk).
There is no secret sauce or formula as to which metric takes priority or precedence, as a great deal has to do with your business and the current market. In effect, there is no easy button to push. However, they all have a compounding effect on value.
Everyone in an anemic market wants growth, and right now it’s the hardest of the three to find. Earnings, per se, are actually easier to create in well-run companies, and size is often the direct result of the ability to grow.
Thus, the trick for most entrepreneurs is balancing these three and applying the right tools to achieve your goals. Here are a few practical questions to consider andget your thoughts flowing:
If I am growing at 15% a year and my earnings are reasonable and consistent, how do I get large enough to get attention and hit the trifecta of value: Growth, Earnings, and Size? The answer may be to acquire an add-on company, or expand horizontally (expand market from local to regional or national to international) or vertically (by buying a supplier).
If my earnings are stable but growth is stuck, perhaps bring in expertise to ignite growth or find new markets, channels or products that can scale quickly. Remember, earnings are ok, so chances are fixed costs are covered and running more “sponges through the bucket” will only help absorb costs and increase earnings. You can attack these organically or inorganically.
If my growth is up and I’m getting bigger, but earnings are not there, perhaps my costs are escalating or I am not scaling properly. For example, if every dollar in revenue is costing me $0.99 in labor, inefficiencies are not scaling. Consider cost allocation and focusing resources on more fruitful areas.
Of course there are many other Key Performance Indicators (KPIs) or value drivers as you drill down and look to build value (management team, customer quality, recurring revenue, contracts, key technology, IP, etc.). However, on a macro level, choosing to focus on the three main drivers will yield higher value in a sale or buy-out.
Lastly, I would be remiss if I did not mention the effect of capital on these metrics. In today’s low interest environment it may be time to use leverage to deploy cash to grow or acquire and get larger. Sometimes the compounding effect of appropriate capital results in a 1 + 1 + Capital = 4!
If you have not hit your targets for growth, earnings, or size, or feel it’s time for a push, consider looking into a capital raise.
Private equity has close to $1.5 trillion sitting on the side lines looking for good operators and owners that have a demonstrated track record of running companies.
Many private equity players are helping owners take some chips off the table and are helping those companies ignite growth. Sometimes the best way to grow is to use OPM (Other People’s Money) to help you achieve your goals!
Banks are also lending at historically low rates for owner-occupied commercial property. Perhaps freeing up some capital from your building or plant can be a great tool for expansion.
Applying the right capital to your business may be the secret sauce to hitting the value trifecta: Growth, Earnings and Size. Let us know if we can help strategize appropriate capital sources as we have a toolbox full of private equity players.
If you would like to find out the value of your company click here and complete a 10 minute survey which will give you some ideas on how you can boost Growth, Earnings, and Size!