STOP Focusing On EBITDA: $1,000,000 Why
By Tom Schramski, PhD
Volume 1 Issue 16, September 2, 2014
A few years ago, I received a phone call from an owner of a maturing healthcare business on the East Coast. “I’ve decided to sell my company,” she said, followed by, “so what’s the multiple of EBITDA I can expect?” When I inquired about the personal/professional goals she had for the transaction, she said, “Well, it’s just seems like the time is right.” I then shared with her the following story:
Maria, 49, (not her real name) owned a reasonably successful Medicare/Medicaid-funded home care company in the Midwest with nearly $10 million annual revenue that was growing rapidly until about six months prior. At the time she approached us about selling her company, she believed it “might” be the time to sell. The basis for her “might?” She was beginning to plan for her future and would like to have more time to spend with her adult children (and likely grandchildren) in the coming years. There was no sense of urgency, but she was tired of the 60+ hour weeks that she still committed to her company.
During the previous six months, she had initiated a number of cuts, including reducing the entry-level wage for direct care workers, at the urging of her accountant who indicated this would increase her bottom line and EBITDA in preparation for a sale. After six months of instituting these efficiencies, her growth had slowed significantly and her bottom line had only improved slightly. She had also lost one of her top managers and there was increasing discontent among her workforce. Her time at work had not decreased as she had new problems to consider.
We discussed the valuation and market pricing of her business as well as a couple of new options. These options included strategically developing her business over two years while making some adjustments along the way, including extricating her from most of the day-to-day operations of her company and rescinding the entry-level pay reductions for new employees. The final twelve months of the two-year plan would incorporate some slowing of growth, consolidation of overheard, and leaning of her management structure.
Within the first 100 days of the changes, growth increased, and within six months revenue was up 15% over the past six months. As she increased the visibility of her growth targets for her top managers (see our next issue of SV) with a focus on revenue quality (more profitable), she found it was easier for her to pull back her business time commitment to 25-30 hours/week, which reduced personal stress and allowed her to see that owning the business another year could substantially increase her proceeds at transaction.
And that’s what happened. By strategically re-investing herself and the company’s revenue, while addressing more immediate stressors, she was able to increase her sales price $1 million more than she would have received less than two years prior. She also was able to honor her goal of spending more time with family within a reasonable period of effort.
It would be misleading to suggest that EBITDA has no role in the valuation for a business or her ultimate transaction success. But, it would also be misleading to say that focusing only on EBITDA yields the best strategy. The value of your bottom line is composed of many related factors and simply cutting your way to get there may not be attractive to a sophisticated buyer. They will look under the hood to make sure the value is there for the long run and a short-term fix is usually transparent.