Two companies in the same industry can have very different valuations. Here is an example of two companies that both have an EBITDA of $6 million but with two very different values. Business One is valued at five times EBITDA, which prices it at $30 million. Business Two is priced at $42 million, which values it at seven times EBITDA.
Below is a value difference checklist.
- Profitability
- Revenue Size
- The Market
- Growth Rate
- Regional/Global Distribution
- Management & Employees
- Capital Equipment Requirements
- Systems/Controls
- Uniqueness/Proprietary
- Intangibles (Intellectual property/patents/brand, etc.)
Of the variables on the above checklist, the one that stands out the most is growth rate. When buyers are considering value, growth rate is a major variable. For example, Business Two has a growth rate of 50%, whereas Business One has a growth rate of just 12%.
To discover the real growth rate story you need to answer some important questions.
- Where is the company’s growth coming from?
- Are the company’s projections believable and achievable?
- Where is the growth originating? In other words, what products or services are driving growth? Will those products or services continue to drive growth in the future?
- Are there long-term contracts currently in place?
- How is the business obtaining its customers for the projected growth?
- How reliable are the contracts/orders?
Finding the difference in value between two businesses that appear similar usually resides in growth rate. Don’t overlook this factor. In order to obtain an accurate valuation, you need to know a company’s growth rate and the key questions to ask regarding its growth. EBIT’s valuation professionals and business brokers utilize advanced valuation techniques and an understanding of economic conditions to provide effective valuation services.