Before diving into strategies, let’s review some essential terms you’ll need to know to make informed decisions:

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of profitability and business valuation that allows for industry comparison.
• Adjusted EBITDA: Beginning with a standard EBITDA, financial analysts will add-back or deduct expenses that might not be commonplace for a typical buyer. For example, some businesses are owner-operated and might need to add in a CEO salary as an adjustment to EBITDA. 
• Multiple: The value of your company expressed as EBITDA x (“multiple”). For example: a company with $2,000,000 EBITDA valued at $20,000,000 has a multiple of 10, and that same company valued at a multiple of 7 would be sold for $14,000,000. A $6 Million difference!
• Investment Bank: Unlike the name suggests, investment banks and investment bankers are not the folks you buy stocks and bonds from. Investment banks help facilitate the purchase and sale of businesses, and they help businesses raise capital. When a business is sold, it is often with the help of an investment banker. 

Why EBITDA Matters

EBITDA is the most commonly used measure of a business’s profit potential used by investment banks and business brokers. EBITDA focuses on the company’s operating performance by excluding non-operational expenses. This provides a more accurate measure of how well the company is performing in its primary business activities, which is crucial for potential buyers and investors.

Your Potential Value

Increasing EBITDA multiples can significantly enhance a company’s valuation, making it more attractive to investors and potential buyers by reflecting greater market confidence in its growth prospects and operational efficiency. To achieve this, companies should focus on improving operational efficiency, demonstrating consistent growth, and strengthening their competitive position. These strategies collectively improve financial performance and market perception, driving higher EBITDA multiples and ultimately increasing the company’s overall valuation.

Identifying Risks

However, as the owner of a small private company, you face unique risks that can significantly impact this value. Key risks include:

• Owner Dependency: Can reduce value by 10-30%.
• Customer Concentration: Dependence on a few customers.
• Sales Pipeline Strength: Stability and predictability of future sales.
• Supply Chain Risk: Concentrations and other risks in accessing much needed components or inventory.
• Financial Statement Condition: Accuracy and completeness of financial records.
• Management Team Depth: Experience and capability of the management team.
• Operational Inefficiencies: Lost productivity.

Overcoming Obstacles

Without addressing these risks, your business, dependent on you might see a 20% discount. Additional risk factors can further reduce enterprise value. For sellers, this often means shifting a portion of the payment to an earn-out, adding risk to your total payout as future payments will be contingent on post-sale performance and requiring you to stay in the business longer than you want.