There are many things that make companies strong and valuable. After examining countless companies over the years from an M&A perspective, I have found the following to be the key metrics or traits that make lower middle-market companies most valuable – worth 10x or more of their cash flows. (Large companies are typically valued at higher multiples due to their size.)

  1. High gross margins as compared to their industry
    Gross margin is the basic relationship between what you pay for your product and what you are able to sell it for. High gross margins mean these companies are fundamentally doing something special – basically adding more value than their competitors. This is the first thing I look at when trying to analyze how well a company is run.
  2. High EBITDA (cash flow) margins as compared to their industry
    This is similar to having a high gross margin but also reflects how efficiently you are able to run your company. For example, we like EBITDA margins above 15% for manufacturing companies. The higher you go above 15%, the better. High EBITDA margins are also an indication that a company’s revenues are scalable.
  3. Higher sustainable revenue
    This essentially means that the chances of continuing to generate your revenue into the future are high. This is what makes a 10-year Treasury note pay 3% while a mezzanine debt might pay 12%. The difference is how certain you are to be repaid. High customer concentrations and large project-based revenues, for example, usually bring some level of doubt as to the sustainability of revenues.
  4. High growth
    Growth is the sizzle in the M&A world, making your company a lot more exciting to a buyer. While demonstrated growth is preferred, a good growth story adds value. It is simple math. Any investment is worth the future cash flows it can produce, and growth simply drives up the present value of future cash flows.
  5. Strong people
    Especially in small to mid-market companies, the people driving the bus are key. Highly valued companies have strong people in key positions., and buyers always want to know a lot about the people at the top of the company. Personally, I would never invest in a small company without a very strong operator.
  6. Size of cash flows
    As a company’s EBITDA (cash flow) grows, its multiple also grows. There are definitely breaking points around roughly $2 million EBITDA, $5 million EBITDA, $7 million EBITDA, $10 million EBITDA, etc. At each level, value multiples increase and the number of investors interested in your company also grows.
  7. Clean companies
    By this, I mean owners have made an intentional effort to run their companies as they were getting ready to sell them. Eliminating problems that any potential buyer or investor will look at as a hurdle to overcome will, at a minimum, expedite a deal and potentially increase its value. Ideally, you want your company to run as cleanly as possible, especially heading into a transaction.
  8. Existence of someone trying to make a market in your industry
    This is typically Private Equity or could be a strategic company trying to do a roll-up or otherwise trying to establish a more dominant position in your industry. These situations are where we have seen ultra-high valuations in an industry.

Of course, there is a lot of detail that goes into making companies strong in each category; that is why there are volumes of books on the subject of making companies more valuable. These are the key things I look for in deciding what we might be able to transact a company for, which has led to some dramatic results. For example, companies increased value 15-fold in two years. Another company that had $9 million in revenue was worth nearly $1 billion within seven years. Why?

Because these companies were hitting on all of these cylinders.

If you are hitting on all of these cylinders, your company may be worth more than you think. GBQ’s Transaction Advisory Services values the opportunity to sit down with you and discuss your company and its potential value. After all, who is empowering your growth?


Article written by:
Wade Kozich
Senior Director of Transaction Advisory Services
GBQ’s Chief Liaison to Footprint Capital

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