By Michael Torney, J.D., CFP®, LL.M., CEPA
After a business owner has completed an enterprise value assessment and gone through the protect stage, it’s time to evaluate whether to build the business. Two ways an owner can build value are through increasing EBITDA (earnings before interest, taxes, depreciation and amortization) or through improving their multiple. A business’s multiple is a range determined by the private market. The enterprise value assessment assigns a value to the business, a range of values possible, and steps to improve the multiple.
When improving EBITDA, you can look at tactical or strategic action items. Tactical items are things like improving expense controls, identifying opportunities for improvement in operations, letting go of unprofitable clients or clients that require too many resources. Strategic items are things like evaluating organic and inorganic growth strategies, improvement on budgeting/forecasting, and making better decisions with capital investments.
One of the steps that improves a business multiple is by improving your intangible assets: Human, Structural, Customer, and Social Capital. These intangible assets are key drivers of value.
Human: Maybe your business needs help in evaluating how you attract and/or retain talent. Are you having problems articulating your value to prospective candidates? Are new employees leaving within the first year? What do you have in place to motivate your team? Is there a path of professional growth available? People often want to be part of something bigger than themselves, and be part of an organization that can help them achieve their dreams.
Social Capital: This is your culture. It encompasses things like your company’s purpose, vision, mission statement. Do you have these? Are they well defined and incorporated into your strategic plan? This also is your brand – how strong is your brand in the community?
Customer Capital: This is the strength of your customer relationships. Are you dependent on a few key customers? Are you too niched in on one area? Do you need to expand to different geographies? What about your suppliers/vendors? Those supplies are “customers” of a sort as well since the quality of your offerings depends on the quality of those relationships.
Structural Capital: This measures the systems and processes in place. Do you have detailed financial statements? Is there a written process in place for how to handle new clients? What about if there’s a disagreement among employees or owners? Are there written policies in place for HR?
Finally, keep in mind your timeline. If your runway is short, you may only have time to clean up a few things. If you have a longer runway (3-5+ years), you have more time for building business value.
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