Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference? One can look at the usual checklist for the answer,
such as:

• The Market
• Management/Employees
• Uniqueness/Proprietary
• Systems/Controls
• Revenue Size
• Profitability
• Regional/Global Distribution
• Capital Equipment Requirements
• Intangibles (brand/patents/etc.)
• Growth Rate

There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:

• Are the company’s projections believable?
• Where is the growth coming from?
• What services/products are creating the growth?
• Where are the customers coming from to support the
  
  projected growth – and why?
• Are there long-term contracts in place?
• How reliable are the contracts/orders?

The difference in value usually lies somewhere in the

company’s growth rate! © Copyright 2015 Business Brokerage Press, Inc. Photo Credit: jeltovski

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