3 Levers to Boost Enterprise Value

Prioritizing a company’s enterprise value is key to all aspects of the business—including enhancing its financial condition, influencing culture, driving sustainable success, and maximizing the future selling price. However, boosting enterprise value is easier said than done—not to mention how time-consuming it can be. It’s a common question in entrepreneurship: How can business owners create value for their business in the most effective, profitable, and beneficial way?

In this article, we’ll summarize some of the takeaways Jeremiah Jewkes presented at Ampleo’s 2023 CFO and Growth Summit for why a merger and acquisition strategy is a powerful tool that can supercharge enterprise value, as well as three key levers that can help you boost the value of your M&A plan: utilizing debt in your favor, creating revenue and cost synergies, and developing a valuation multiple. Let’s dive in.

Why Use M&A to Increase Value

Deploying a merger and acquisition strategy is one powerful way business owners can create value for their companies, especially in middle-market businesses. According to EY-Parthenon, there is a strong positive correlation between M&A and enterprise value and total shareholder return. Frequent M&A activity can not only generate tremendous value quickly but also provide an alternative to slower growth strategies, such as hiring new sales reps and sales teams.

For example, let’s say Business A has $1M EBITDA and a value of $10M. Business A acquires a smaller company, Business B. If Business B has $0.5M of EBITDA for 4x and a purchase price of $2M, it would generate an additional $3M of value for Business A. After the acquisition, in total, Business A would have a value of $15M, all generated by buying one company.

Beyond simply making acquisitions, business owners can capitalize on mergers and acquisitions to accelerate their enterprise value by strategically using three additional levers. Here’s how.

1. Use of Debt in the Acquisition

Companies can accelerate the value of an acquisition by using debt to fund the purchase price. Instead of using cash from operations or equity, using debt can help you generate more value without using the capital of your business. This is a cheaper option for a company than equity, partly because it doesn’t require issuing shares.

Imagine that Business A either partially or fully funds the $2M purchase price of Business B with debt. In this case, if Business A decides to sell the business five years later, it can generate arbitrage value without deploying its own capital.

2. Revenue and Cost Synergies

Similarly, making strategic acquisitions that fit your vertical and complement your business can help you create revenue synergies that boost enterprise value. In this case, your company can offer value at every stage of the cycle to find new customers, increase the cost of your services, and generate revenue.

When you achieve this, each dollar of sales is enhanced by scale, pricing power, and cross-selling other products, driving more value than you originally paid for. Revenue synergies are often seen in healthcare. For example, dental practices often aggregate to increase the value of the fillings they offer, enabling them to charge more for their services because they are a bigger organization.

Cost synergies can work in a similar way as revenue synergies to reduce costs and increase the value of acquisitions. Identifying and eliminating duplicate systems, contracts, and employees is a powerful way to dramatically increase EBITDA and maximize the benefit of your acquisition.

3. Valuation Multiples

This is the holy grail of value creation. Multiples compare a company’s earnings and cash flow to its enterprise value, providing a great measurement to concentrate on throughout the M&A process. With valuation multiples, every dollar of earnings could be worth 11 or 12 times more, all depending on the value your business offers to the buyer.

For example, a combined business may be worth more than 10x EBITDA due to its scale, strategic relevance, scarcity, or influence. Scale has value in the marketplace, as big companies are often worth more than smaller businesses. Similarly, strategically offering more service lines or changing the competitive landscape can multiply the value of your business, enabling you to utilize a valuation multiple increase. That is multiplicative in terms of the impact on the business.

Maximizing the value of a merger or acquisition to drive the most enterprise value for your company requires careful consideration and expert guidance. At Amplēo, our team of seasoned consultants is equipped to help you navigate through the complexities of enterprise value and M&A, driving your business toward explosive growth.

Reach out to us to start increasing your enterprise value today.

This article was written based on the session conducted by Jeremiah Jewkes at Ampleo’s 2023 CFO & Growth Summit.