Maximize your multiple

Features - Strategies

Things you can do today to make your company worth more down the road.

May 5, 2010
Brian D. Corbett

Editors’ note:
This is the first of a three-part series from
Lawn & Landscape on exit strategies for business owners. Watch for next month’s installment, which focuses on how to get as much money out of a sale as possible.

Image: Saul HerreraSo, how much is your company worth? Chances are, you have a ballpark figure in mind based on what you know your earnings to be combined with the country club conversation about “multiples of earnings” and industry gossip about who got the highest multiple from which buyer. The true value of your company, however, will not be determined by industry gossip, but by fundamental valuation methods and how you choose to run your business on a daily basis.

Whether you’re hoping to cash out tomorrow or in 10 years, you can take steps now to pinpoint the value of your company from a buyer’s perspective and maximize your multiple on that value. Armed with the knowledge of how the market will value your business, you can steer and track your company’s value so you know that you’re not just growing the top line but the intrinsic value of the enterprise as well, ensuring that you will exit at the right time for the most money.  

The first step is recognizing that value is more than just a multiple, and beginning to see your company’s value through the eyes of a buyer. While the multiple is significant, it means nothing unless you know what’s behind the definition of earnings on which it’s based.

While accountants and financial advisers employ different methods to determine the value of the company, the method most used by buyers and investors interested in green industry companies is an analysis of EBITDA, which means earnings before interest, taxes, depreciation and amortization.

An EBITDA valuation isolates the cash profits from variable accounting and financing decisions, enabling interested parties to compare the profitability of multiple companies. When determining what multiple your company warrants, your successor will be highly focused on your company’s EBITDA, as well as a host of non-financial factors, including reputation, quality of services, personnel, revenue by service type and client retention, among others.
We’ll examine each of these non-financial factors in the coming months. For now, let’s break EBITDA down to basics.

EBITDA begins with earnings. Higher earnings and significant anticipated earnings growth result in a higher valuation in the mind of the buyer. While much is said about the correlation between purchase price and gross revenue, buyers determine the price they are willing to pay by starting with your earnings.

Earnings are determined by subtracting the operating expenses of running your business, including direct costs of the job, indirect cost related to field operations and the overhead it takes to run your organization from your revenue.

While the buyers understand that no one wants to pay more than their fair share in taxes, significant personal expenses in excess of market-based compensation understate your company’s earnings and could make it harder to sell your company. Remember, it’s only with a willing and knowledgeable buyer that we can maximize fair market value. With solid accounting and high profit margins, however, your revenue doesn’t need to be in the top 50 of the industry rankings to get a deal done. After all, it doesn’t matter to a buyer what your revenue is if you are not making any money. In the words of a favorite landscaping client, “It’s not what you sell, but what you keep!”

Your successor’s goal is to determine the actual profits he will reap from your company over time. The interest you’re paying on third-party debt, bank lines of credit and equipment loans is largely a function of the choices you make – whether to buy new or keep running your existing fleet and how you finance that equipment and your working capital. When a successor buys your company, you will likely pay off the debt you owe at or prior to closing, and the buyer will begin to make his own financing choices. Thus, a potential buyer will add back to your earnings the amount you pay as interest expenses to third parties. Any interest income you receive on cash balances, however, will be excluded, since you will likely be able to distribute most or all of the cash prior to closing. These adjustments allow the buyer to consider the potential effect of his own plans for leverage on the company post-closing. 

Buyers are not concerned with the state and federal taxes you’re paying on your company – they’re concerned with the taxes they will have to pay. Your buyer will likely employ different tax strategies than you, or might opt to convert your company to a different corporate form, like an S corporation or an LLC. All of these decisions may change your company’s tax rates. The buyer will add back the amount you paid in taxes to your earnings, just as he did with your interest expenses, and for the same reason – to get a big picture of the profitability of your company before he makes his own strategic decisions about taxes and capital structure.

Depreciation and Amortization
Depreciation is simply the cost of an asset spread out over the expected useful life of the asset. Amortization is the term used when the assets are intangible, like trademarks, goodwill and brand recognition.

There are a variety of ways to manipulate the value of a company’s assets, including the useful life of the asset, the accounting method used to determine depreciation, and the scrap value of the asset. EBITDA focuses on cash profits, and depreciation and amortization are non-cash expenses. To evaluate the profits the buyer could derive from your company, he will add all depreciation and amortization expenses back to your earnings so that he can start fresh with his own asset valuation methods and strategies. 

It’s important to note that while EBITDA is the preferred tool for comparing the profitability of different companies, your company’s EBITDA may be quite higher than the real operating cash flow buyers seek. This is due to the fact that EBITDA does not take into consideration the cash used to fund your capital expenditures. Different types of buyers may scrutinize capital expenditures to varying degrees – financial investors may deduct your “cap ex” from earnings in order to model their returns.

That’s a lot of accounting speak, but EBITDA is an important concept to understand as we take the series on to the next issue, where we will profile the three most common transaction types for the owners of green industry companies – strategic third party sales, private equity recapitalizations and ESOPs – and explore which of them might be the right solution for your company.

The author is managing partner of CCG Advisors, Atlanta. Send him an e-mail at