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FROM THE FOUNDER
What increases value
I f you are an owner of an AEC firm and hope that your company or your share of ownership is going to be worth a lot of money some day, you need to constantly keep the things that can increase the value of your equity top of mind. Many of these things will increase the value of your ownership in an external, or even internal, transition.
The difference in entrepreneurship versus plain old small business is this idea that you can build a pot of gold at the end of the rainbow, and that the financial rewards you can earn from your business are greater than just what you can extract from it every year. Certain things DO increase value if you plan to sell externally. Truthfully, these are many of the same things that will also increase the value of your ownership in an internal transition. Let’s take a look at some of these: 1. Revenue growth rate. This is number one. If you have a firm that is rapidly growing – be that through internal growth or mergers and acquisitions – it will increase its value. Over the years many people questioned our consistent focus on firm growth here at Zweig Group. This is one of the reasons for it. Growth in top line revenue is far more important than your historical EBIT (earnings before interest and taxes) to
value creation. It impacts your projected EBIT dramatically. And while some people try to make a distinction between internal growth and acquisition-related growth, most buyers will not. If you prove you can grow by acquisitions and successfully integrate those companies, that is seen as a very valuable core competency that can be leveraged. 2. Profitability. Yes, profitability is important. Yet, my experience is your valuation from an external buyer will never fully recognize extreme profitability, nor fully penalize a lack of profitability. Right or wrong, most buyers will assume that your extra high profitability is a reflection of a lack of investment in your company – in training, IT/systems, or marketing – and they will have to make those investments if they own your firm. If you aren’t very profitable, they will
Mark Zweig
See MARK ZWEIG, page 12
THE ZWEIG LETTER NOVEMBER 28, 2022, ISSUE 1466
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