By David E. Coit, Jr., DBA, CM&AA
Volume 3 Issue 24, November 22, 2016
Have you ever wondered why two seemingly similar companies sell at significantly different multiples? What are buyers seeing in ostensibly comparable companies that causes sale price differences? The three secrets of market multiples are:
1. Potential Growth
Buyers are willing to pay more for companies with high growth potential than companies perceived as having low growth potential. High growth potential companies create exceptional customer value; exploit high-growth market segments; are innovative; have strong brand identity; create service differentiation; and invest in the development and delivery of new or enhanced services.
2. Cost/Ease of Scalability
Buyers are willing to pay more for companies that can scale up easily and at relatively low cost. Telemedicine and telehealth are examples of companies that allow for relatively low cost/easy scalability. Conversely, imaging centers are high cost/hard to scale enterprises that require significant reinvestment once the centers reach capacity. In addition, they often face physical space limitations on growth.
3. Company Specific Risk
Buyers are willing to pay more for low-risk companies than high-risk companies. Low-risk companies have regular strategic planning sessions; fully engaged competent senior managers; fully engaged board of directors or advisory board; strong intracompany communications; a fostering corporate culture; strong customer loyalty; barriers to competition; good geographic/demographic location(s); low customer concentration; competent marketing/sales team(s); strong brand recognition; low employee turnover; a continuous learning culture; sound quality assurance team; effective operations; solid finance and IT teams; little or no litigation; and more.
It is quite common for company owners to perceive the market value of their company in terms of market multiples based on prior sales of similar companies. But when comparing themselves to 'similar' companies that have sold, they may not be privy to information about the growth potential, cost/ease of scalability, and company-specific risk of those prior sales (a.k.a., the three 'secrets' that impact market multiples).
David is a seasoned commercial and corporate finance professional with over 30 years’ experience. As part of the VERTESS team, he provides clients with valuation, financial analysis, and consulting support. He has completed over 150 business valuations. Most of the valuation work he does at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
David holds certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, and Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors. Moreover, the topic of his doctoral dissertation was business valuation.
He earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. He is a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, David spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, he analyzed the financial condition of thousands of companies and had successfully placed over $2 billion in corporate debt.