Enterprise Value

The Enterprise Value Staircase

Enterprise Value Staircase

Every small defense company wants to grow their business while also increasing their value. But how do you accomplish this without it taking decades? Understanding the Enterprise Value Staircase and how to sustainably increase your enterprise value is a proven way. Learn more about this process from the video below from the defense contractor consultants at High Stakes Partners.

Video Transcript:

Every small defense company wants to grow their business, and in doing so, increase their company’s value. But how can you sustainably grow your business and effectively increase its value without it taking decades? What can you do to accelerate this value growth process?

Before we answer that, let’s think about the two elements that determine a company’s value. The first is profit, commonly referred to as EBITDA. The second is the element used to define how special your company is – generally called the “Multiple”.

So, as you work towards increasing your profit, you should also consider what you might do to increase your multiple. Many think the Multiple is constant, however, you can push the Multiple higher, which will impact value even more than your profit will.

Let’s say you have a small defense company. If you don’t take the steps to increase your multiple, your value growth curve will grow at a slow pace, which is nice but purely linear and methodical. There are many elements influencing your Multiple, of which your revenue size is a primary one. You will always have a ceiling to your Multiple based on your revenue size.

To break through those ceilings, you need to increase the size of your company, right? Right! Now, let’s move on. Imagine a series of steps on a staircase – each step represents a new range for your company’s value. Each step also has its own ceiling which sets the pace for how much your Multiple will increase. The lower you are on the staircase, the more suppressed your multiplier.

You can walk the staircase two ways. Organically – a natural but lengthy process – or you can supercharge your growth and reduce some of the risk while you’re at it by incorporating some inorganic tools. Right now, we’re focusing on the accelerated inorganic approach using outside capital. Let’s create a story. There are three companies, each with their own unique size, profit margin, and multiple…

Each owner sells sixty-five-percent to an outside investor – providing them with loads of up-front financial security – and retains thirty-five-percent shares rolled into a merger which is the newly created entity. Not only are the three companies more profitable and diversified together, but from day one, the size increase has allowed them all to graduate one or more stairs. The Multiple itself goes up, instantly increasing their equity.

There are many other advantages of mergers that can make your company that much stronger and well-positioned for the future. It not only benefits you, but also your employees and customers while giving you opportunities you wouldn’t have on your own.

It decouples your personal and family risk from the company, enabling better strategic decision-making and better sleep at night. As a leader, executive, and visionary, you can now level up and truly show your talent in a bigger, more diverse entity of which you’re still a major stakeholder.

And the loyal employees who’ve always been at your side? They’ll get the same opportunities to level-up and take on more roles that would otherwise not be available in smaller companies.

In terms of your customers, you can provide them with a much broader level of service and diversity. This not only enforces higher levels of trust, but you also have a much broader pedigree to bid on bigger projects.

In terms of the company’s capital, you’ll have a lot more freedom to invest in the company’s infrastructure, development, and research and development. For example, with more financial freedom, you can professionalize your accounting and other business systems according to your vision.

You can also  professionalize your marketing campaigns, sales, and business development to promote an even higher Multiple to further drive your company upward. And all those big proposals that would otherwise be out of your reach? You can now afford them with a much bigger budget than you had before.

Invest more in technology and products to streamline your goals, acquire a higher niche of companies to help with your strategies, and make other strategic investments to enhance your business objectives.  All of this is made possible with these concepts. Go for all the opportunities you never thought possible!

As the entity continues to evolve and mature, adding more capabilities and acquisition partners, the Multiple can continue to climb the steps, each with a higher ceiling. Growing profits and Multiples leads to supercharged value for the rolled over equity. So, what does this mean for the original owners? It means financial success, increased professional responsibility, and exciting challenges. It also means better opportunities for all employees involved from day one.

Now, imagine when this entity is eventually sold. What would its equity be compared to the three companies offering similar services but capped by their size? Through these combinations, not only have you increased overall equity value and your personal professional opportunity, but you’ve also diversified your services, become more useful to your customers, increased your ability to do more strategic investments, provided much more opportunity for your employees, and scaled to a point where you have genuine competitive advantages as a larger, more diverse entity.

The added diversification and size that comes with bringing these organizations together results in higher Multiples, and since you’ve moved up the staircase, the ceiling for those multiples is higher.

When you do finally reach that second exit, and the new company is sold, you can look back on the great new professional challenges you had fun meeting as you leveled up – all while enjoying a significant second bite of the apple.

If you want to level up both yourself and your company, reach out to us and we’ll show you how you can start this exciting phase of your journey. High Stakes Partners. Helping your business run up the enterprise value staircase. Visit our website or contact us today to reach the corporate peak of success!

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