company with a smaller EBITDA may see its profit wiped out by a single event. Therefore, not only is EBITDA critical in its own right for determining valuation but it is also linked to the actual multiple itself. Key Man/Woman - Identifying who these people are is important. They should be operating as leaders and it should be evident that the Owner has backed away from the business as much as possible so they are no longer key to day-to-day functioning. We always say we like it when Sellers talk about how much golf they play or how many holidays they go on. This gives a Buyer confidence that the business can run without them. The lack of a key person (s) once the owner leaves is one of the main reasons a financial Buyer (i.e. Private Equity) will reject a company for consideration. It is like having a plane with no pilot. It is generally very difficult to hire people from the outside into this position so this is generally not a viable short-term solution. Documented Process - Many companies have few documented processes and rely heavily on a few individuals being involved to keep everything running. This is even more exacerbated when one of these individuals is the Seller. The problem with this is that if one of these people is removed for some reason, the business can suffer. This type of model is also not very scalable as it bottlenecks around these individuals. This creates risk (and hassle) for a Buyer post-sale which will often knock onto a business's valuation. The solution to this is to move to a more process-oriented approach. One way to address this is to create an operations manual which documents all of the processes in the business. This exercise will force a re-evaluation and documentation of these processes often leading to natural efficiency improvements. The operations manual will also
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