If you are a business owner and are interested in the value of a company’s business , you know that simply multiplying earnings before taxes by a multiple, known as earnings before interest, taxes, depreciation, and amortization (EBITDA), is You can determine the business value of your company. Once this method is learned, many company leaders will find ways to determine and increase this multiple. However, this is only half of the formula.
Profitability is the other half of the formula.
Every company is constantly striving to improve the profitability of the company. System integrators tend to optimize project management, reduce costs, and diversify service offerings.
Optimize project management
Integrators can improve company profitability by optimizing project management. This requires the development of a project plan, which includes outlining the scope of work, the timeline for completion, and the resources required to complete the project. By managing projects more efficiently, system integrators can reduce the time and cost required to complete each project. The result is increased project profitability and more projects completed in a given amount of time.
System integrators can also reduce costs by optimizing operations. This requires reducing the cost of hardware and software components, negotiating better deals with suppliers, and optimizing staffing. By reducing costs, integrators can increase profit margins and remain competitive in a highly competitive market.
Diversification of service products
Finally, increase profitability by offering a variety of services. By expanding into new markets or providing additional services to existing markets, system integrators can attract new customers and increase their revenue. This requires expanding into new regions, offering new services such as after-sales support or cybersecurity, or partnering with other companies to offer packaged service offerings. By diversifying their service offerings, integrators can reduce their dependence on a single revenue stream and create new opportunities for growth.
However, there is no single measure of profitability.
When acquirers evaluate a target company, they typically adjust the income statement to read the company’s financial health. They mainly adjust the following three aspects to enhance the value of the company, namely, eliminating discretionary expenses, minimizing the company’s working capital needs and identifying excess expenses.
Eliminate discretionary expenses
Many private business owners make operating decisions based on tax implications, not necessarily concerned with the impact on business value. For example, a business owner pays real estate entity rent. In some cases, business owners may pay above-market rent. This makes sense if the owner’s personal tax situation is taken into account. However, this is not the case for acquirers looking to reduce rents and thus improve the company’s profitability. The same applies to business owner overpay. If business owners pay themselves more than they would pay other outside alternatives, the acquirer has an opportunity to reduce costs.
Minimize working capital
Another way to increase the value of a company is to minimize the working capital required to run the company. This can be achieved by improving inventory management, optimizing accounts receivable, accounts payable, and reducing the amount of cash tied up by other working capital items. By minimizing working capital, the seller can demonstrate to the acquirer that they do not need to hold large amounts of cash in the day-to-day operations of the company. This makes the company more valuable to potential buyers.
determine excess costs
Finally, depending on the type of potential buyer, the seller can add value to the company by estimating the cost reductions or operating synergies that can be achieved after the transaction. For example, if the company is acquired by a third party and owns a building large enough to accommodate all employees, any expenses associated with running the current office can be reduced. There are also potential synergies between the two companies that could improve work efficiency. In comparison, both methods can reduce costs and increase profitability.
All adjustments need to be well-founded and justified. You need to fully demonstrate the profitability of your business in the hands of the acquirer. The process of adjusting margins is part art, part science, and finding where to start can be difficult. However, if you choose to work with an experienced business broker or M&A advisor, you can identify areas of adjustment and develop an appropriate strategy for demonstrating these adjustments to potential acquirers. Even if you don’t plan to sell your company, it’s still important to have a clear understanding of these adjustments and their impact on overall value.
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Profitability plays a bigger role in determining business value than you might think. If you want to determine your business value, we can help. Contact us to find out how our new Growth Accelerator service can help you maximize business value.