How to calculate a company’s enterprise value

February 1, 2012 -  By

By now you have closed out your 2011 financials and you might be asking what this thing is worth? It’s a metric you should quantify each year regardless of your perceived “exit” timeline.  Growing a company’s enterprise value requires planning, people, and perseverance. Great deals don’t just fall into an owner’s lap overnight. It takes planning and involves execution, typically over a 12-36 month time period. So where do you start?

There are perceived stereotypes to overcome as it relates to valuing a landscape company.   We have all heard (4) four to (5) five times your adjusted earning or (1) one times your revenue. Right?  Did you meet the guy at GIE who got 8X? How about the databases where business brokers publish their deal results? All this gets confusing, but let’s start with some basics.

Consider a checklist of value drivers and value detractors.   Buyers will rate these and other factors which will impact “your multiple” on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).   While there are several specific approaches and methodologies to valuing a company, and hiring a professional makes sense, consider the information below as a “practical” start to evaluating your company’s tangibles and intangibles.

  1. Amount and Stability of Historical Earnings  over the last 2 Fiscal years (Adjusted EBITDA)
    1. 12%-15%: Puts you well in the game.
    2. 15%-20%: Separates you from the pack.
    3. 20%-25%: Puts you at the head of the class. Not many out there!
  2. Revenue mix/business model
    1. 10% or more: You are a professional sales organization!
    2. Single Digits:  Acceptable but your Pipeline &Sales channel velocity need improvement.
    3. Flat or Down: This will cost you dearly over the next 2 years.
  3. Revenue Growth and Stability in Top line
    1. Contract Maintenance/ Turf care: Still Leads the pack.
    2. Plant healthcare/Snow/Residential Maintenance:  Getting more interesting.
    3. Design Build or Bid Build:  Pass.
  4. Customer Concentration /Retention
    1. Diversity is key. 80/20 Rule.
    2. 85% retention is solid.
    3. Credit risk can’t be ignored.
  5. Location & Market
    1. Appetite for new market.
    2. Add market share.
    3. Seasonality could be a make or break.
    4.  Secondary Markets are gaining in popularity.
  6. Stability and Depth of Employees/Management
    1. Licensed and Certified.
    2. Defined Org. – Sales, Production, Account Management, Admin.
    3. Tenured, E-verify, H2B.
  7. Condition of Fleet and Equipment
    1. Good working order/New/ Well Maintained.
    2. Large Capital Expenditures needs will drive down value.
  8. Technology and Information Systems
    1. Real time Data/ Integrated Systems equals premium.
    2. Budget vs. Actual Accounting & Job cost data are required.
    3. CRM, GPS, and Satellite Imaging a plus.
  9. Strength of Company’s Balance Sheet
    1. Strong Working Capital.
    2. Low Debt Load.
    3. Retained Earnings: Equity: Does it exist?
  10. Current and  Possible Future Role of Owner
    1. Does he/she drive sales: If so, how much?
    2. Who manages customer relationships? Depth?
    3. How involved are they in production?
    4. Management style, flow of data.
    5. Credit/Health/ Status in community & Industry.
    6. Fire in belly: What motivating factors exist?

Understand each buyer or suitor will evaluate the items above and can create metrics or a grid to support the multiple they are willing to pay. It is important to note the key component in evaluating the items above is to know the benchmarks and to take action during your budget process to discuss and quantify the impact of these items. Remember, if you build it, they will come!

About the Author:

Harkness is a landscape management consultant with 3PG Consulting. Contact him at jeff@3PGConsulting.com.

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