Increasing the Ebit on Sale
Most businesses today are sold on a simple basis of EBIT multiples (EBIT being the technical term meaning earnings before interest and tax – the base measure of ongoing profitability of the business) where the seller simply accepts conventional or marketplace valuation norms. Most owners don’t understand that by preparing a business for sale they can move outside the norm and access considerably improved valuations. This process does take time – so if you are planning to sell your business next weekend this strategy is not really appropriate, however very few business owners are in an urgent rush to sell and therefore have the potential to substantially improve the valuation by doing some fairly simple things.
Most business owners become complacent (even lazy) and therefore it takes little to fine tune the business model to achieve substantial improvements that will significantly add to value.
Identifying clearly add backs and abnormal amounts that have passed through the accounts allows us to get a better view of what the future sustainable earnings of the business might well be. A conventional EBIT multiple seriously understates the value of the business if future profitability is substantially different from past performance – a client I was working with recently has been spending significant amounts of money, for example, on ongoing development of software – if this can be verified, quantified and documented we can add these amounts back and substantially add to the sustainable earnings moving forward.
Often very little effort is required to improve profitability even marginally but it has an immediate effect on the value of the business.
Even small improvements in future growth of profitability will have a major impact on today’s valuation however many business owners fall into the trap of not being able to prove or demonstrate how that growth might be delivered or on what it is based – buyers will therefore completely discount or even ignore this factor.
A sale I was involved in recently was very successful in proving potential for growth within the business that they had (for various reasons) so far been unable to unlock. The growth was clearly available for the future owners should they have the motivation, desire and ability to implement those new growth areas.
Why don’t most business owners do it ?
I guess many of us are caught up in the day-to-day operation of the business and are therefore unable to unlock our headspace to allow us to deliver what could be the most significant contribution to our future wealth – certainly more of a contribution than managing that next sale today or dealing with staff issues