STRONG MARGINS = STRONG MULTIPLES
Strong margins usually indicate more profit per dollar of revenue. And this metric is key to buyers, since it portends the following:
- Pricing power – customers tolerate higher prices
- Operational efficiency – less revenue is required to generate each dollar of profit
- Scalability – incremental revenue can flow disproportionately to the bottom line
- Lower risk – the business has more cushion if revenue declines
- Better cash flow – buyers care about what ultimately becomes distributable cash
- Enterprise value – enhanced two-fold by higher EBITDA and also increased multiple
Based on the industry, revenue, EBITDA/margin, and growth rate, the multiple range can be estimated. Other key factors for increasing the multiple follow:
- Sustainable EBITDA margins
- Consistent or accelerating growth
- Annual recurring revenue (ARR)
- Low customer concentration
- Low owner dependence
- Strong management team
- Predictable cash flow
- Defensible competitive advantages
- Accurate financials
- Large addressable market