Companies in the small- to middle-market segment need to understand the key drivers of valuation, since they are often able to focus their operating goals in order to maximize the potential valuation range. Therefore, it is important to know that the multiples, (Seller Discretionary Income SDI multiples), a company achieves for its business is directly correlated with the following seven characteristics:
- Strong revenue growth
- Significant market share or a strong niche position
- A market with barriers to entry by competitors
- A strong management team
- Strong, stable cash flow
- No significant concentration in customers, products, suppliers, or geographic markets
- Low risk of technological obsolescence or product substitution
Successful mergers and acquisitions are neither an art nor a science, but a process. In fact, regression analysis demonstrates that the number one determinant of deal multiples is the growth rate of the business. The higher the growth rate, the higher the multiple of cash flow that the business is worth.
Sam Jobara
