Business Model Attributes that Maximize Enterprise Value (EV)

Ephor Newsletter Q4 2023

In preparation for this Newsletter in early August, as we customarily do every 2 years or so, we reached out to ~50 of you (Our Peers) to survey their input on the most important items that you would like us to present in this Q4 Newsletter. First, we would like to provide a huge “Thank You” to the 34 organizations/leaders who invested their time and effort to tell us what is in your mind these days.

The feedback provided by Our Peers sorted nicely into 3 areas:

  • Business Model Attributes to Maximize Enterprise Value

  • Revenue Growth and Marketplace Penetration

  • Should I Engage with Private Equity and/or Investment Bankers?

To keep the length of the newsletter to a manageable length, but yet provide detailed and holistic guidance we will exclusively present the Business Model Attributes required to Maximize Enterprise Value in this Newsletter. For convenience at the end of this newsletter, we have provided links to our guidance on the other 2 peer group input areas.

Business Model Attributes that Maximize Enterprise Value (EV)

In general, the private capital and lending community, due to the all the disruptive, uncertainty and risk in the exogenous world, is simply seeking to deploy capital to the “least risky” and most scalable and productive business models. Business Model risk is something “the institutional community” can control therefore during times like these they focus on risks they can control.

Therefore the “Lowest Risk Profile” Business Models need to illustrate the following high-level attributes:

  • Recurring Revenue Streams: Revenue that is: “insulated and known” while backed up by contractual obligations: has illustrated historically high client retention rates: has proven upselling within a client base (revenue extension from existing clients): and documented referral success from the client base and sector.

  • A Portfolio of New Client/New Revenue Sources: The institutional community is mandating a revenue generation model that is NOT solely dependent upon “Direct Selling”. Therefore, your revenue model needs to illustrate multiple “routes to new clients” (or a Portfolio of Revenue Sources). At a minimum these routes to market must include: effect channel distribution: formal referral sources: strategic partnerships/JV’s etc. A productive and scalable “Portfolio” of revenue generation sources is clearly “lower risk” while providing a “lower cost of new client acquisition” is very attractive to both the investment community & strategic buyers as such, Enterprise Valuation (EV) uplift often results.

  • Productization of Services Brand Awareness and Brand Equities: While difficult to accomplish the implementation of proven effective Product Management and Product Marketing of Services along with illustrated penetration into niche target markets by garnering the “Ideal Client”. Recent data illustrates that this proven attribute can add as much of 1X to 2X increase of EBITDA at the EV level.

  • Operational Measurements and Metrics that have been proven to create increased Productivity and Scalability: almost all organizations have or should have some type of non-financial measurement and metrics. These measurements and metrics need to have illustrated what processes or enhancements need to be made to the business model to improve productivity. At Ephor we have 10 basic scalability and productive metrics that we use to monitor the improvements in our clients and investments. What are your measurements and how do they “lower the execution risk” of your business?

  • Lowering of Fixed Cost to More Variable Cost Structures: all organizations especially during inflationary and disruptive times should focus and deploy variable costing initiatives effectively. Outsourcing of non-mission critical functions is necessary along with a deep dive into all costs should be an ongoing focus of leadership. Obviously the more variable costs in a business the lower the risk profile.

  • Recurring EBITDA Performance: Clearly if the above attributes are prevalent in your business model, the higher probability of consistent and perpetual recurring EBITDA performance. A key metric is the % of EBITDA to Revenue: if this % increases consistently this is an attribute that illustrates lower risk and will result in very attractive EV values. As a point of reference impressive proven and consistent Recurring EBITDA performance can result in a 2x multiple of EBITDA “UPLIFT” on the EV of the company.

  • Change Effectiveness of the Leadership Team: A critical success factor for all organizations is “can and has the leadership” illustrated the ability to illustrate transformation change? Has the leadership team “surrendered some of the sovereignty” to external expertise and influences? What all investors know and what we at Ephor know is, that leadership teams, especially CEO Entrepreneurs/Founders who have “lived in their own internal bubble” hardly ever realize the full value of the company. (For additional Guidance on Operational Improvement click here)

As you end 2023 and prepare for 2024 our guidance in the near-term is to focus on 1-3 of these attributes that present the highest risk profile of your company. Being able to illustrate transformation change and progress on just 1-3 of these attributes will not only lower the risk profile of the company but will “create the infrastructure” for improved near-term performance.

In closing, as we indicated earlier the links to: "Revenue and Market Penetration" and "Should I Engage with Private Equity and/or Investment Bankers?" are below.

Good Luck in Q4 2023. We would guide you and encourage you to utilize these disruptive times as an opportunity to build and enhance the capabilities and capacities of your business model.

Garry E. Meier Strategic Advisory Practice Lead Ephor Group, Inc.

Click here for Revenue and Market Penetration Click here for Should I Engage with Private Equity and Investment Bankers