Gauvreau Accounting Tax Law Advisory
If you're preparing to raise capital, bring on investors, or eventually exit your business, understanding how your business is valued is essential. While there are many variables involved, there’s one financial indicator that often stands out above the rest: EBITDA.
But it doesn’t stop there. Let’s explore the key performance indicators (KPIs) that significantly impact the value of your business, especially from the perspective of potential buyers or investors.
1. EBITDA: The Cornerstone of Business Valuation
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s one of the most commonly used benchmarks when evaluating business profitability because it strips away variables that might distort the core operational performance of the company.
However, most businesses don’t use EBITDA straight from the books. Instead, they calculate what’s called a normalized EBITDA. This adjusted version removes non-essential or non-recurring expenses—like personal travel or family members on payroll—that wouldn’t continue under new ownership.
Once your normalized EBITDA is determined, it’s often multiplied by a market-based factor to estimate the business's value. This multiplier can range from 2x to 20x, depending on a range of factors including your industry, growth potential, customer diversification, and more.
2. Revenue and Recurring Revenue
While EBITDA is central, revenue still matters—especially if a large portion of it is recurring. Businesses with subscription models or long-term contracts are often valued higher because their income is more predictable and sustainable.
3. Dependency Risks
Valuators will also assess how reliant your business is on:
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You as the owner
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Key employees
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Major customers or suppliers
If the business can't function without these individuals or partnerships, that introduces risk—and lowers valuation.
4. Customer and Employee Satisfaction
High satisfaction scores from both customers and employees signal a healthy business environment. Valuators will often consider Net Promoter Scores (NPS) or other engagement metrics. Happy customers and a loyal team can substantially boost your business’s perceived value.
5. Cash Flow vs. Capital Intensity
Another essential financial KPI is cash flow. You might have solid profits, but if you constantly need to reinvest in expensive machinery or equipment, your available cash flow diminishes. In contrast, a low-capital business model with strong cash returns to the owner is more attractive and often commands a higher valuation.
Bottom Line
If you're serious about increasing your business’s value, it starts with understanding the numbers—and what they actually mean to buyers or investors. EBITDA and cash flow may be the headline figures, but qualitative metrics like team culture, customer loyalty, and operational resilience also play a major role.
At Gauvreau, we specialize in helping entrepreneurs assess, track, and improve these key performance indicators to maximize value over time.
