A company generates EBITDA of two million euros and is valued at six times EBITDA. Another reports exactly the same result and receives offers at eight times. Why? Because buyers do not buy last year's EBITDA.

They primarily buy the earnings and cash flows the company is expected to generate in the future, adjusted for the risk that those results may not materialise.

This is why simply applying an average sector multiple can be an overly simplistic way to value a company.

The sector provides a reference point. The specific quality of each business largely determines where the company will sit within that range.

Many factors can influence that perception. Seven deserve particular attention.

1. Consistent and credible growth

Growth creates value when there is evidence that it can continue.

A company that has grown consistently for several years and can explain clearly where that growth came from presents a more credible story than one whose performance depends on a single exceptional year.

But buyers do not analyse only the past. They want to understand the sales pipeline, market size, geographical opportunities, new product launches and available production capacity.

An ambitious projection in a spreadsheet is worth little without evidence to support it.

A demonstrable growth plan may justify a different valuation.

2. Recurring and predictable revenue

Not every euro of revenue has the same quality. Recurring revenue, multi-year contracts, high customer-retention rates or historically stable commercial relationships provide greater visibility over future results and reduce risk.

By contrast, when a large part of the customer portfolio must be rebuilt each year, the buyer faces greater uncertainty.

This is one reason why business models with contracted or recurring revenue often achieve higher valuations than companies with similar results but less visibility.

3. A diversified customer portfolio

A company can be exceptionally profitable and still present a significant risk if half of its revenue depends on one customer.

Concentration does not necessarily mean that the business is unattractive.

But it raises an unavoidable question: what happens if that customer leaves?

The greater the effect of a single event on future results, the higher the perceived risk.

Diversifying customers, geographies and, where possible, end markets can reduce that vulnerability.

Interestingly, some of the best opportunities to improve a company's valuation do not come from increasing EBITDA, but from reducing risk.

4. A management team that does not depend on the shareholder

This is one of the most important issues for many SMEs.

The founder knows the customers, negotiates with suppliers, approves prices, decides on investments, manages people and holds much of the organisation's accumulated knowledge.

For the company, that presence may have been fundamental to its success; for a buyer, it may represent a risk.

If value creation depends on a person who intends to sell their shareholding remaining in place, the company and the shareholder become difficult to separate.

A capable second tier of management, documented processes and distributed responsibilities make the business more transferable.

A business that can operate without the current shareholder is normally easier to acquire.

5. Sustainable margins and strong cash conversion

EBITDA matters, but the ability to convert earnings into cash matters even more.

Two companies with the same EBITDA may have completely different profiles if one requires continuous investment in equipment and working capital while the other converts a high proportion of its earnings into free cash flow.

A buyer will therefore analyse CAPEX requirements, average collection and payment periods, inventories and working-capital volatility.

High margins are also more valuable when there is a sustainable explanation for them.

Proprietary technology, scale, market positioning, production efficiency or differentiation may represent genuine competitive advantages.

A high margin that exists only because certain costs are temporarily below normal will be unlikely to justify the same premium.

6. Barriers to entry and differentiation

One simple question helps reveal part of a business's strategic value: if someone had sufficient capital, how difficult would it be to replicate this company?

Proprietary technology, recognised brands, certifications, technical know-how, long-term customer relationships, licences, economies of scale or network effects make a business harder to replicate.

That differentiation increases its ability to defend margins and its competitive position.

What is difficult to reproduce tends to be more valuable.

7. Quality of information and level of preparation

There is one final factor that many owners underestimate: an organised company inspires confidence.

When financial information is consistent, reporting makes the development of the business easy to understand, contracts are organised and the principal indicators are monitored regularly, a buyer can validate the investment thesis more readily.

The opposite happens when repeated inconsistencies arise during due diligence. Each uncertainty introduces risk, and each risk may become a discount, an additional warranty or a condition to completion.

Preparing a company for sale also means making its positive attributes easy to demonstrate.

The multiple can be influenced

Not all of these factors can be changed quickly. A company cannot diversify its customer portfolio in one month or build an autonomous management team a few weeks before beginning a sale process.

This is precisely why considering a future transaction well in advance can create value.

If a shareholder is considering a sale in three years, that period can be used to improve results and also to improve the quality of those results.

  • more growth;
  • more recurring revenue;
  • less concentration;
  • stronger management;
  • greater cash generation;
  • more differentiation;
  • better information.

The market will continue to determine the multiple, but the company can do much to determine which company it presents to the market.

At Fenix Capital Partners, we consider this preparation a fundamental part of any M&A value-creation strategy.

Increasing EBITDA is important. Ensuring that the market attributes more value to each euro of that EBITDA may be equally important.