Two Similar Companies ~ Big Difference in Value

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?

One can look at the usual checklist for the answer, such as:

The Market
Management/Employees
Uniqueness/Proprietary
Systems/Controls
Revenue Size
Profitability
Regional/Global Distribution
Capital Equipment Requirements
Intangibles (brand/patents/etc.)
Growth Rate

There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:

Are the company’s projections believable?
Where is the growth coming from?
What services/products are creating the growth?
Where are the customers coming from to support the projected growth – and why?
Are there long-term contracts in place?
How reliable are the contracts/orders?

The difference in value usually lies somewhere in the company’s growth rate!

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