The Enterprise Value Gap

A) Professional Business Managers

Professional business investors such as Private Equity firms buy, build, then sell their businesses within 3 to 5 years.  During this time their business management focus is on how to achieve the maximum capital gain upon their exit from the business.  How the business is financed, managed and grown along the way determines the business’s Enterprise Value at exit. Typically a company’s Enterprise Value is the single most important factor in the ROI for Equity Fund investors. Why is this?  Because most Enterprise Values are calculated as multiples of the company's sales revenues and / or pre-tax profits, or EBITDA.  A low-end multiple for a poorly-prepared company could be 3X Profits.  On the other hand a well prepared company's multiple in the same industry could be as high as 6X profits.  If the last twelve months' profits before an owner sells the company are $2M, this could result in Enterprise Valuations between $6M and $12M.  Capital Gains - the goal of every entrepreneur.

B) Entrepreneur – Managers

Conversely, the great majority of private business owners, most of whom some day will want to sell their business, conduct relatively little planning, refinement and operational management of the business focused around maximizing its Enterprise Value when they exit. Though the business may be their biggest personal asset, the majority of entrepreneurs simply manage the business around monthly cash flow and year-to-year profit distribution, paying little or no attention to the Enterprise Value of the business.

Why does this Enterprise Value Gap exist?

Simply put, most entrepreneurs ignore the EV's influence on their future exit results because they may not be aware of its dominant significance, or perhaps they lack knowledge, tools and experience to drive their business towards the most lucrative exit value. Research has consistently shown that most business owners have vague or unrealistic ideas of what their business enterprise is worth on today's market, and what exit value could be attained in the next one, two or five years. (And over the next few years, for baby boomers, this exit is coming sooner rather than later.)

Bridging the Enterprise Value Gap

Onyx Associates offers a series of consulting and guidance services, tools and workshops to help mid-market business owners bridge the Enterprise Value Gap and so optimize their eventual net worth upon an exit. We call this program Growth & Exit Management, or GEM, that aims to assist clients in the journey pictured below: