A Profit and Loss Doesn't Show the Whole Picture: Here's Why.
A Profit and Loss doesn't show the whole picture: Here's why.
There is no denying as a business broker, when I see a healthy P&L statement meeting all the industry benchmarks and minimal normalisations, I am excited.
The Business Sales world, however, does not begin or end with a healthy Profit and loss statement. Many other factors impact the asking price and saleability of a business. The list is exhaustive, however, below are some that stand out :
EBITDA Size
The old expression, "size matters" comes into play when selecting an appropriate EBITDA multiple for your Business. larger companies command higher EBITDA multiples and thus it follows larger transactions will garner a higher EBITDA multiple. This is also because a larger EBITDA generally means that the business has a good organisational structure and enough beef in the employee structure to withstand sudden resignations at the time of transition from one owner to the other.
Revenue Trends
Businesses demonstrating consistency and superior historic and prospective future revenue growth will typically command a premium asking price and a higher EBITDA multiple. Although, a short spike in revenue due to a single sudden client or project has little impact on the value of the business.
Customer Concentration
The presence, magnitude or absence of customer concentration significantly impacts the health and eventually the value of a business. companies having significant customer concentration, which we define as any single customer responsible for more than 20% of annual sales or any 3 customers generating over 50% of annual sales, command lower than average EBITDA multiples than industry peers possessing equivalent revenues and profitability yet with a more diverse customer base.
It is possible to minimise the potential negative impact of customer concentration on value by acting as a sole source supplier and/or having favourable long-term agreements with large customers.
Industry Concentration
Companies whose revenues are concentrated within a particular end market are more susceptible to the impact of sector-specific variables, such as its cyclical nature, the introduction of new regulations or disruptive technologies, increased competition, etc.
Management Team
The less the business depends on the owner, the better the transferable value of the business. A CEO who is responsible for many areas of the business is harder to replace and thus his presence in the business is crucial, making the business transition harder. Having staff that is a second in charge or take senior roles if wanted, documented policies and procedures and other factors that make staff less indispensable increases the value of the business and makes the business less susceptible to failure or suffering during a transition.
In essence, just looking at the profit and loss statement is never enough. The science of valuation of a business is more of an art and the factors that influence the health, longevity and market value of a business are never an exhaustive list. having said this, recognising and assessing critical factors that impact a business, especially during a valuation and acquisition gives a true picture and a realistic value of a business.
Tags: selling finance accounts
About the author
Shweta Tripathi
With over half a decade of successfully operating her Business Sales Agency in South Australia, Shweta has the knowledge and expertise required to ...
