M&A Insight #4 For Background Screeners
The value of your company is derived from your bottom line… not your top line.
BUSINESS VALUE COMES FROM….
If you are a golfer like me, you’ve most likely heard the adage, “drive for show, putt for dough”. In the golfing world this means that while its great driving the ball 300 yards, the money is made by sinking those pesky five-foot putts.
Company Value is Found in Profitability NOT Sales
As it happens in the M&A world, your sales are your “show” and your profitability or bottom line is your “dough”. What does this really mean? In our industry, 99% of buyers are going to value your company off your profitability and not your sales. Why is this? Because value is derived from how quickly a buyer can recoup their investment.
Here is an example: Company A and Company B are both doing $1M in sales. Company A is making 10% in profits while Company B is making 33%. Are these companies worth the same amount of money? Absolutely not. Company B is 3x more valuable than Company A because Company B is making 3x what Company A makes. If both companies were valued at $1M (based on the revenue), a buyer would need 10 years to earn back the purchase price for Company A but only three years for Company B. Which would you do if you were the buyer?
Here is another example: Company A is doing $1,000,000 in sales and is making 10% profit. Company B is doing $700,000 in sales and is making 33% profit. Are these companies worth the same amount of money? Someone could argue that Company A should be worth more because Company A is bigger. That person would be wrong.. Company B is more valuable than Company A… more than 2x more valuable.
Act Now: Push For Increased Profitability Starting Today
So what does this mean for someone who is looking to potentially sell your company one day? It means that you must do everything in your power to increase your bottom line to its max potential because that is truly the way to maximize the value of your company.
What Items Impact The Bottom Line?
Are you overstaffed? What do you charge your clients compared to your costs? Do your criminal costs averaging less than $1.00? What are your sales per employee, are they greater than $250,000? Where are your gross margins: are they at least 50% but closer to the 60-70% range? Achieving these benchmarks along with many others will increase your profitability and make your company more valuable today and when it is time to sell..
If you are looking at your numbers and thinking about selling but you are not sure if you will be able get the money you want for your company, start going over your P&L Statement line by line and ask yourself if you could improve each individual line item. You may need outside help doing this. Maximizing your bottom line may not be your strong suit which is okay but there are experts who can help your company be set up for ultimate success.
So when should you start maximizing your profits? The answer: NOW!!!
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About the author: Evan Zatt has been with Berg Consulting Group since 2007 and has led the Mergers & Acquisitions (M&A) team since 2012. Evan has been in charge of helping nearly three-dozen M&A transactions totaling over $250,000,000 in sales. Evan has the expertise to help companies looking to acquire or to divest and achieve their goals. In addition to guiding business owners with all aspects of an M&A transaction, he enjoys helping CRAs with financial management, strategic planning and assessing operations opportunities and challenges.