| Most of our clients aspire to a similar end game; | | | | is a disproportionate multiplier effect to its value by |
| some type of liquidity event (sale). Often, such | | | | virtue of which buyers are in play. Private Equity |
| transactions lead to extraordinary material wealth, | | | | investors and lenders view the $5Million EBITDA |
| and provide a payoff for the entrepreneur's years of | | | | business as better prepared to weather economic |
| sweat equity. | | | | fluctuations. We have heard the cries of smaller, poor |
| A recent study validates content previously published | | | | performing businesses that have very little access to |
| in this space. The value of businesses is not | | | | capital. Conversely, the flight to safety has created |
| proportionate based on size. A $50 Million revenue | | | | remarkable competition for businesses of the desired |
| business could be worth significantly more than 10 | | | | scale ($5 Million+). |
| times that of a $5 Million business. Within the current | | | | Thus, the entrepreneur needs to be patient and |
| M&A environment, the "size premium" is magnified | | | | focus on the infrastructure required to support |
| further by a dearth of "deal quality". | | | | growth. Taking the time to grow a business delivers |
| In 2009, companies with less than $5 Million in | | | | an incredible incremental return. Assume a $40 Million |
| EBITDA (earnings before interest, taxes, depreciation | | | | business earned an 8% EBITDA ($3.2 Million) and was |
| and amortization), yielded an average 5.1x multiple, | | | | valued at five times ($16 Million). If the business were |
| compared to those with more than $5 Million who | | | | to leverage its infrastructure and grow to $50 Million |
| commanded a multiple of 5.9x. The premium paid | | | | at 10%, it would realize a $5.0 Million EBITDA. If the |
| (16%) for profitable larger companies last year was | | | | higher margins and scale were to produce a half turn |
| five times the premium paid in 2006 (3%). A study | | | | (multiple) increase, the enterprise value would be: |
| conducted by GF Data Resources concluded that | | | | ($5M x5.5=$27.5M) Thus, the 25% increase in sales |
| "average performers" (companies with less than a | | | | and 25% increase in profitability yields a whopping |
| 10% EBITDA) earned a 4.3x multiple compared with | | | | 72% increase in enterprise value. |
| 5.7x for above average performers. That is, a | | | | The size premium should give us pause. It provides |
| company that earns a $5 Million profit before taxes is | | | | the entrepreneur with motivation, and the knowledge |
| a far more attractive asset than one with less | | | | that his years of work and grit can provide a |
| revenue or lower margins. | | | | significant pay off. |
| As an organization moves through its lifecycle, there | | | | |