How to increase the valuation multiple in your business
By Dolf Campman, Regent Assay
When valuing a company, it is common knowledge that the valuation derived is calculated by Profit x Multiple. It is widely assumed that M is market driven, but this has been disproved. While all industries have a benchmark, M in the Profit x Multiple calculation can be optimised by:
- mitigating business risks and
- exploiting “growth accelerators”.
The main areas where businesses have risks that drive down M are:
- systems and processes
- balance sheet
- income statement
- management structure
- market factors
If a business can improve these factors, M increases and drives a higher valuation.
Growth accelerators positively impact M. These include:
- people and organisation
- routes to market
- products and IP
Strengthening these factors will help increase a company’s M value.
This method means that comparable transactions are paramount, as these will set the range for the valuation multiple to be achieved. If a highly sophisticated business is sold at 12X EBITDA, then this will set the top of the range making it a benchmark company.
If at the other end of the scale a company with a high level of business risk attracts a valuation of 4X EBITDA, then this will become the benchmark for the lower end of the spectrum.
A business can therefore benchmark itself against other similar companies in its sector that have commanded high valuation multiples. This will give the business the tools to identify where improvements can be made in order to increase its M.
Based on its many years of experience in selling entrepreneurial companies, Regent Assay developed a service called ”Equity Acceleration Plan” to determine the optimum path for a company to maximise its opportunities, minimise its risks and influence positively the multiple achieved on sale. In the meantime, Regent Assay has achieved a good range of case studies demonstrating successful EAP project implementations.
Dolf CampmanGCG member firm
Corporate Finance, M&A
London, Birmingham, UK
T: +44 121 200 3800
Regent Assay is a leading mid-market corporate finance and consulting practice with a unique blend of strategic advice and transaction services. We work with owners and management teams who are looking to prepare for a full or partial exit, and accelerate their growth organically or by acquisition.
Dolf Campman has considerable experience in investment banking in the technology, media and telecom industries. Over many years, Dolf has gained experience with a wide variety of transactions in the TMT sector including IPOs, secondary issues, private placements and private equity investments.
Published: M & A Newsletter, No. 01 Autumn 2021 l Photo: Kris Kuzniar - stock.adobe.com