Go beyond the numbers to see what drives company value

It is a common misconception that the key to an investor's heart is paved with spreadsheets full of impressive financials. While the story behind the numbers may be important, it is just the opening act, especially in the government contracting market.

The main performance? It is often the qualitative factors that steal the show.

You are likely familiar with terms like EBITDA multiples and discounted cash flow, which are valuation methods thrown around frequently in mergers and acquisition discussions. While these metrics are used as a way of quantifying a valuation, they're not the be-all and end-all. After all, some of the most valuable companies have thrived with minimal free cash flow—at least initially.

In this article, we will look at three key qualitative aspects that can significantly elevate a business's worth in the eyes of investors.

Alignment between market fit, capabilities, and capture potential

In GovCon, a single major task order win can skyrocket a company’s value overnight. Because of this, the story around a company’s market positioning, its capabilities to serve that market, and the company’s ability to identify and capture adjacent opportunities can drive exceptional value. Even in the absence of impressive historical financial results.

Identifying and understanding how this trifecta works together in your business is a great start to building value. Strategic buyers with potential synergies that can fill or improve certain components of this trifecta may see exceptional value in your business. Financial buyers can also benefit if there is an avenue for improvement in these areas through investment or as a bolt-on to an existing platform company.

Take Uber for instance. Before earning its first dollar in profit after five years, the company's valuation already oscillated between $35 billion and $110 billion. Why? Market fit, capabilities, and potential.

Balancing innovation and focus

Innovation for the sake of innovation can be a perilous route for companies that are not tech giants like Microsoft or Apple. True value-building innovation should enhance your market position or help further capitalize on your company's successful track record with a customer.

The key is deliberate innovation—it should not distract from your core business but complement it. If an innovation does not have a clear path to market penetration or monetization, it may be wise to reconsider its execution.

Positioning the next generation of leaders

Every successful business is built on the foundation of talented and dedicated individuals. Investors, too, recognize that people are the core of the business and are vital to each successful investment. If you are a business owner planning for retirement, it is crucial to reduce the company's dependence on you. Invest time and effort in mentoring and cultivating a new generation of leaders that investors can have confidence in.

This not only secures the future of your business but also helps maintain its value. When a company is less reliant on a single individual, it avoids the “key person discount,” where the valuation of a business is diminished if it is overly dependent on the owner.

Investors see a strong leadership team as a decrease in risk and a necessity for a sustainable and scalable business. It can also translate into a higher valuation regardless of past financials.

Conclusion

Creating lasting value that will attract investors involves much more than just the numbers. It is a craft that involves a strategic vision for the business and proactive planning. You can start down the path of value creation by asking yourself these three questions that were discussed in this article:

• Does your business plan have a clear alignment between your chosen market, capabilities, and capture strategy?
• Are you innovating in a way that has a clear path to success and is not a distraction?
• Have you identified and properly trained and incentivized the next generation of talent in your business?

Brian Pierce works with owners in GovCon to evaluate, plan, and execute strategic business decisions at Rock Hall Partners. Rock Hall Partners advises GovCon companies on mergers and acquisitions and provides strategic evaluations for businesses looking to improve their value. For more information on our offerings, connect with Brian on LinkedIn or visit Rock Hall’s Website.