Improving Your Exit Multiple

Improving Your Exit Multiple with Value Creation Levers

When you sell your company, the value of your company hinges on something called the exit multiple. An exit multiple isn’t arbitrary; it’s shaped by different factors acting like levers. Each lever nudges your company’s value up or down. At Maven we call these “Value Creation Levers”.

These value creation levers are all connected, and sometimes, they can make figuring out the market value of your company tricky. To maximize your exit multiple, and therefore your company’s value, you need a blend of smart insights and strategies. It’s about focusing on what makes your company valuable and ensuring you’re making the right moves to increase that exit multiple.

What Are Value Creation Levers?

Determining a company’s worth is a bit like figuring out the price for a house.

A house “exit multiple” is typically shown as $ per square foot of living space. That $ per square foot can vary a lot depending on many factors, including: house size in square feet, age, features, location, condition, etc. A company’s value is set by the exit multiple multiplied by the EBITDA (earnings before interest, taxes, depreciation, and amortization) at the time of acquisition. For example, a company with a $10 million EBITDA and a five-times exit multiple (5X) would be valued at $50 million.

A house’s value can be boosted by renovations or landscaping or a variety of other changes. Similarly, a company’s value is shaped by various factors—we call these the ‘value creation levers.’ At Maven, we’ve pinpointed 11 of these levers. They’re a mix of what your company does (operations) and where it’s headed (strategy).

Increasing your exit multiple isn’t a result of random improvements. It is a result of a well-thought-out plan to make your company more attractive to investors today by laying a strong foundation for future growth, stability, and resilience. That’s how you build a company that doesn’t just look good on paper, but really stands out.

Tailoring Strategies for Business Growth

Value creation isn’t one-size-fits-all. Think about selling a house. Where do you invest your time and money to increase its value? Is it repainting the living room, adding a pool, or maybe replacing the roof?

Some improvements might significantly hike up your house’s price, while others might not make much or any difference. It’s all about understanding what potential buyers really value. Maybe that fancy deck doesn’t appeal to them as much as a renovated kitchen would.

In the world of business, boosting your company’s value works in a similar way. It’s crucial to choose where to focus. Misalignment between what you think adds value and what your potential buyers are looking for can lead to missed opportunities. It’s more of a strategic maneuver than a cooperative process—it’s about understanding the other side’s playbook.

Just like talking to a real estate agent to understand what homebuyers are looking for, Maven plays the role of giving you those insights for your business. We dive deep into understanding what investors really care about.

Is it worth adding that ‘deck’ to your business, or will they value something else more?

This isn’t just about intuition or guesswork. It’s strategic. The more you understand what the buyer values, the better prepared you can be.

11 Valuation Levers

Lever 1: Level of Integration

Let’s consider a scenario: imagine you have five barber shops. Now, are these five separate shops, each with its own brand, website, and management system? Or are they part of a single chain, operating under one brand, one website, and a unified management approach?

The latter, a single business with five locations, is typically seen as more valuable. Why? Because it’s scalable. You have one cohesive brand, one website, one team overseeing operations, and one system for managing costs. It’s about doing more with less, creating a streamlined, efficient operation.

This concept of integration is crucial in private equity. It’s about showing how your business operates as a cohesive whole rather than as separate entities. That the business has a strong foundation for further growth.

Here’s an example. One of our clients was a manufacturer with multiple locations. Although they ran on the same ERP system, each location operated like a separate entity in terms of financials. The general ledger was not the same at different locations. Using the financials to manage the business was like comparing apples and oranges. Our client thought that their ERP systems were integrated because it was the same IT platform. But from the buyer’s perspective it needed work to operate as one system.

In short, integration isn’t just about having the parts; it’s about how well those parts work together as a whole. It’s convincing buyers that your business is a well-oiled machine ready to scale up and expand.

Lever 2: Leadership Team

When it comes to your leadership team, investors are looking for a group that can not only manage the current business but also drive substantial growth. They’re asking: Does this team have the right mix of skills and experience to navigate upcoming challenges and opportunities?

For instance, we conducted due diligence on a ~$200M food additives company, eyeing growth to $1B. The burning question was whether their executive team had enough capability and experience, especially in international markets, to achieve this ambitious goal. It’s situations like these where the need to possibly change or enhance your leadership team becomes crucial. If the
buyer feels like the executive team needs changes, that translates into more risk for achieving success. And greater risk lowers that element of an exit multiple.

So, critically evaluate if there are any skill gaps or experience voids that need filling. The stronger and more capable your leadership team, the more confidence it instills in buyers about the future of your business.

Lever 3: Acquisition Readiness

There is a high regard for businesses adept at not just acquiring but seamlessly integrating bolt-on acquisitions. This ability acts as a significant growth catalyst.

Take, for example, a client we worked with. They had acquired three separate businesses but hadn’t fully integrated them. While they had a track record of acquiring businesses, they lacked evidence of successful integration.

This raised a crucial question: could they replicate successful integration on a larger scale?

The key here is demonstrating that your business is not just an acquisition machine but also skilled in blending these acquisitions seamlessly into your existing structure. It’s about providing concrete evidence—proving that your acquisition approach is systematic, dependable, and enhances overall value.

Lever 4: End Markets

Think of end markets as the end point for the product or service you provide. Sometimes it is your direct customer and sometimes it is your customer’s customer.

For instance, if you are a metal fabricator, your end market would be agricultural equipment if you sell to John Deere. But the same or similar part sold to Caterpillar puts your end market as construction equipment.

Investors look at the end markets because they want to know whether they are investing in a business that will benefit or be at risk from the industry they are dependent upon. The forecast for agriculture equipment may be a steady 3% growth while the forecast for construction may be headed to a boom or a bust. Investors are also interested in the profit margins for selling into different end markets. A metal fabricator selling into the healthcare equipment market is likely making higher margins than one selling into the transportation sector.

So, when evaluating end markets, understand whether the underlying markets you serve are growing or not. Make sure your customers are in industries that are on the upswing and more profitable.

Lever 5: EBITDA Margin

An EBITDA margin can be an objective indicator on the strategic strength of a business.

For example, we worked with a manufacturing company that had a 12% EBITDA margin. Buyers told us that if they reached 15%, it would indicate they were not in the commodity end of the industry. Just because your investor materials say you sell a unique product doesn’t make it so. High EBITDA margins will add credibility to that assertion. Higher EBITDA margins will show you to be a fundamentally different—and more valuable—business. This shift could mean adding a full 1x to their valuation multiple.

Lever 6: Operational Efficiency

Operational efficiency is all about how smoothly and effectively your business runs. Investors are looking at things like whether your equipment is up-to-date, if your manufacturing processes are streamlined, and how well you’re using technology and data to stay ahead. Have you implemented modern approaches to manufacturing like six sigma, kaizen, lean or other continuous improvement systems?

Boosting your operational efficiency isn’t a quick fix. It’s more like a marathon than a sprint. It’s woven into the very fabric of your business strategy, developed over the years through careful investment and attention.

A business that can grow without tripping over its own feet, supported by a strong operational and technological base, is a shining star in the eyes of investors.

Lever 7: Engineering and Technical Capabilities

Your business’s engineering and technical capabilities can be true differentiators. It’s about what your company does that no one else can. For example, imagine you have a special way of manufacturing or proprietary machines—this sets you apart in the market.

This uniqueness, whether it’s in your processes, technologies, or the know-how of your people, is a huge advantage. The more unique your approach, the more valuable your business becomes. Customers become reliant on what only you can offer, leading to more stable and predictable revenue streams.

Lever 8: Customer Concentration

It’s great to have loyal customers, but relying too much on a few big ones can be risky. What if one walks away? Your revenue could take a serious hit.

Selling to existing customers is often easier, but it’s crucial to encourage your sales team to venture out and bring in new clients. You want to balance the easy revenue from loyal customers with the effort to diversify your customer base.

And here’s where it gets interesting: sometimes what looks like customer concentration isn’t quite what it seems. Take, for instance, a company selling to the military. That might appear to be one customer at a glance. But the Army, Air Force, and Navy have different needs, budgets and decision makers. So, are they really the same customer? This nuance matters when assessing risk and convincing potential buyers of your business’s stability.

To reduce this risk, you might change your sales tactics, explore new markets, or even acquire businesses to tap into new customer segments. The goal is to create a diverse portfolio of clients, ensuring your business isn’t overly dependent on just a few.

Lever 9: Proprietary Data, Processes, or IP

Proprietary assets are anything that gives you a leg up on the competition. This could be a trade secret, a unique database, a patent, or even specific know-how baked into your operations.

Showcasing this unique capability, even if it’s not a defined piece of IP, can really elevate your company’s worth in the eyes of investors. It’s about proving that you have something special that sets you apart and helps you stand strong against the competition.

Lever 10: Proximity to the Customer

The closer you are to your customers, the more secure and valuable your business is. It’s the difference between creating and selling your own branded skateboard directly to the skaters who love them, versus just making skateboards for someone else’s brand. When you know your customers directly, you understand exactly what they want and need. Plus, there’s less risk of being cut out of the picture.

This direct connection is a big deal. It’s not just about making sales; it’s about building relationships. The more direct your relationship is with the end customer, the more protected your business is from market shifts. Investors like this because it means you’re not just a cog in the machine; you’re in control and driving it.

Lever 11: Contracts

Contracts—especially long-term ones—are helpful for securing revenue streams and increasing a company’s value, as they represent guaranteed future income. But, their reliability can depend on the terms, enforceability, and the contracting party’s financial stability. The more your revenue is secured with contracts, the less risk you have for quick changes in revenue.

Contract security means confidence that the agreed revenue will be realized, depending on the contract’s nature and terms. A solid contract with little room for early termination or breach is a valuable asset.

To boost value, aim for longer, legally robust contracts and assess clients’ stability to reduce the risk of breaches or cancellations.

Role of Consulting

Now, where does a firm like Maven fit into all this?

Similar to a real estate agent, Maven can help you understand what the buyers are looking for and how well your business fits their expectations. However, unlike selling a house, the changes that are needed to increase an exit multiple can take years. We work with clients who are years away from selling their business. We help them chart a course so that at the end point, when they are ready to sell, they have done everything they could to improve their exit multiple.

The math is pretty simple. If you can execute a 2-3 year strategy that both improves EBITDA and grows your exit multiple by 1-2X, the value is in the tens of millions. If you start as a business with a $30M EBITDA and a 5X multiple ($150M valuation) and end as a business with $35M in EBITDA and a 6.5X multiple ($227.5M valuation), you have added ~$75M (an increase of 50%) to the valuation of the business.

Unlock Your Business’s Potential

Uplifting your company’s exit multiple is about more than just tweaking numbers. It’s about strengthening the core aspects of your business to make it irresistibly attractive to investors. With Maven’s expertise, we tailor strategies that fit your unique business and market needs like a glove.

Ready to boost your business value and ensure it’s set for long-term success? Each of these levers is a step towards that goal. Partner with us at Maven. Together, we’ll not only elevate your business value but also shape it to catch investors’ eyes and thrive for years to come.