Exploring Enterprise Value – Helps GovCons Focus on Building Value

Exploring Enterprise Value

Setting measurable goals is critical to the success of your GovCon business.  One important question can help guide the decisions you make every day: How much do you want your business to be worth…in three years? Five years? Ten years? 

The process you undertake to answer that question can keep you focused on the actions necessary for a business that adds value as it grows.

Using a Multiple of EBITDA as a Key Valuation Measure 

There are many ways to value a business, such as discounted cash flows, comparable company approach, and a number of other techniques. Ultimately, the total enterprise value is the purchase price a buyer is willing to pay for your firm. Numerous guiding metrics can be used to determine that price, such as price-to-revenue or price-to-EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Within an industry, you can also compare deals by looking at who’s buying what and for how much. This market-based information can establish “multiples” (more on these below). 

Of all the valuation methods, we consistently see a multiple of EBITDA as a key metric. Revenue is a good thing, but profit is what creates value. You need to understand your firm’s valuation potential as a multiple of EBITDA and be keenly aware of what drivers affect that value. 

We highly recommend seeking the advice of an investment banker during this process. You’ll be a more informed participant and help your advisor optimize the process if you can articulate your company’s value as a multiple of EBITDA. If you are not currently strategizing to maximize value, start with this formula: 

Enterprise Value (Multiple of EBITDA) = Multiple * Adjusted EBITDA 

Use the following two-step Enterprise Value Calculator for this important indication of your company’s worth: 

Step #1: Establish Your Multiple

This step requires that you take a hard look at your organization to identify strengths and areas for improvement. You will assign criteria, weightings, and your assessed score to determine an EBITDA multiple. 

An investment banker can help you understand how the market values specific criteria, such as type of work. Staying on top of these drivers is essential in the dynamic federal market landscape. 

You will assign a percentage allocation based on the importance of each criterion, with the allocations adding up to 100%. The weighting assigned will reflect the importance to the acquirer. 

Add or delete the following suggested criteria to reflect your market: 

  • Award Type — These range from set-aside work to full and open contracts. The ability for a buyer to use your contracts is key.
  • Barriers to Entry — Scale these from low to high. Consider distinguishing characteristics, such as intellectual property, hard-to-acquire talent, sole source capability, and unique offerings or credentials.
  • Contract Mix — This ranges from subcontract to prime contract work. Also, consider contract type: fixed price, cost reimbursable, time & material, incentive, and indefinite delivery/ indefinite quantity.
  • Contract Vehicle — Scale from few to many. Consider the quality of the vehicles.
  • Customer Mix — This can range from routine to high demand. Consider sought-after target markets and the depth and breadth of customer access.
  • Organic Revenue Growth — Use a scale that ranges from less than 5% to more than 20%.
  • Recompete Timing — Scale from less than 12 months to more than 24 months. How much runway does your current backlog provide? 
  • Size — Create a scale of annual revenue that ranges from less than $20 million to more than $100 million. Include the ability to add scale for a buyer.
  • Type of Work — This scale of capabilities ranges from staffing to solutions to products. 

Rank yourself against each criterion on a scale from 1 to 10. Weighting * score = the Weighted Score column. The sum of this column is your calculated EBITDA Multiple. You now have the power to see how a focused improvement in any area elevates your score and enhances value so you can be more deliberate in setting priorities.

Step #2: Determine your Adjusted EBITDA and Calculated Enterprise Value

Now calculate your EBITDA by adding back interest, taxes, depreciation, and amortization to your net income. Next, add other EBITDA adjustments. These add-backs—known as adjustments—can meaningfully change value. Be aware that a buyer will heavily scrutinize these adjustments, so make sure they are solid. Adjustments generally include: 

  • One-time or non-recurring items. 
  • Excess costs that do not attribute to a buyer, such as excess bonuses or luxury vehicles 

These items added together equal your Adjusted EBITDA. 

Multiply the Total Adjusted EBITDA by the multiple to determine the Enterprise Value. This is your starting indicator of value. Use this opportunity to compare values. For example: 

Compare multiple scenarios to support decision making. Compare lines of business. When you know there is a value difference related to the EBITDA multiple, you can see how shifts in business focus will affect the overall value. These might include moving from service contract work to more highly valued engineering work, shifting focus from one agency to another that supports more lucrative rate structures, providing high-level engineering work rather than help desk support. Consider how you segment your business and how that affects EBITDA contributions. 

Compare one year to another. Forecast value from one year to the next and compare values based on different multiples. Override the calculated multiple with other factors to assess a value range. Look at the resulting enterprise value and determine whether it lines up with your overall goals. What steps do you need to take to enhance the value? Are your strategic plans aligned with achieving your target? 

How does your firm’s current enterprise value compare with what you want your business to be worth in future years? What needs to be done to better align current operations with this goal? An Enterprise Calculator can bring these answers to life. 

As a business owner or executive, you can easily get stuck in day-to-day decisions and your seemingly endless to-do list. But if you want to crush your long-term goals, you must raise your head above the daily grind and carve out space for planning. Spend time every month assessing and course-correcting. Think of enterprise value calculations as rumble strips on the road. This forecasting system will help guide you to steer your business toward your annual and long-term objectives. 

Download our Exploring Enterprise Value PDF to see more or feel free to contact us for a demo to see how your decisions are leading toward your ultimate destination.