We all know that “money doesn’t grow on trees.” And neither does business value. You can’t just wait until you are ready to leave your business to find out how much “value” you need or want and how much “value” exists in your business. By then it will be too late. The tree metaphor is relevant, though. Value is something that you can grow, nourish and ultimately harvest in your business. Let’s look at an example.
 
Picture three identical companies each engaged in moving time-sensitive freight for customers. All have a national presence, $2 million in EBITDA (earnings before interest, tax depreciation and amortization) and about $25 million in annual sales. It would be logical to assume that they all have about the same value.
 
In fact, one had little value, one sold for 3.5 times EBITDA and one sold for 5.5 times EBITDA. The difference in value was $3 million to $7 million to $11 million.
 
Neither gross sales nor EBITDA alone determined the price and terms of these deals. The key to the variation in purchase prices was the presence or absence of value drivers in the companies, as well as the ability of these value drivers to survive the owner’s departure.
 
Value drivers are internal characteristics of a company that buyers look for in acquisitions. You’ll see that it doesn’t matter if you plan to keep your business forever, transition it to family members, sell it to your management team, or find an outside buyer – value drivers can give you more options, more flexibility and more money from your ownership interest. Strong value drivers are those that are effective and will continue to operate once the original owner departs. Consequently, those are the value drivers that increase both EBITDA and the multiple of EBITDA buyers may be willing to pay.
 
We may measure the effectiveness of value drivers in two ways:

1. their positive contribution to cash flow, and
    
2. their ability to continue to contribute to cash flow under new ownership.

• Company A: The owner/operator was responsible for management and operations, and his personal and industry contacts were the source for new business. All roads ran through the owner so without him, the business had little value.
• Company B: This company had a capable management team. Many of its systems and procedures were state-of-the-art. There was, however, one glaring weakness: The major customer, responsible for more than 50 percent of the company’s revenue, had a decades’ long relationship with the company’s owner, not with the company.
  
  Buyers are much less likely to pay millions for customer accounts that can, and indeed often do, go elsewhere the day after they find out the owner has sold the business.
• Company C: Finding the owner of Company C wasn’t easy. She spent weeks on vacation or visiting grandchildren. When she was in town, she was engaged in a variety of civic and charitable activities. She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team.