Small businesses can increase their value through two levers: (1) growing EBITDA, or (2) experiencing multiple expansion from entry to exit.

Growing EBITDA

Growing the profits is often the easier of the two strategies. It can be achieved through a few means:

Revenue Growth: One of the primary drivers of EBITDA growth is increasing revenue, assuming the profit margin does not decline by more than the revenue increase. Revenue growth can come from expanding a small business’s customer base, launching new products or services, adjusting pricing, or entering new markets to boost sales.
Cost Management: The other way to boost profits is to reduce expenses. Typically, there are two categories: cost of goods sold (COGs) and operating expenses. Depending on the industry, one may be easier to budge than the other. For instance, perhaps there is a lower-cost supplier (decrease COGs) or there is an opportunity to streamline payroll and remove redundant jobs.
Increasing Scalability: Small businesses that have scalable models can grow their EBITDA without a proportional increase in costs. Scalability allows for incremental revenue growth with minimal additional resources.

Multiple Expansion

Multiple expansion refers to an increase in the valuation multiple applied to a company's EBITDA. To calculate an entry multiple, you would take the purchase price for the business and divide it by the earnings at that time. There are a few mechanisms for increasing that multiple:

Improved Market Conditions: This often occurs when market conditions are favorable, such as in a strong economy or a hot sector. Investors may be willing to pay a higher multiple for businesses with growth potential. Recently, HVAC and pest control have experienced a boom of interest leading to higher multiples for the same business. On the flip side, increased interest rates hurt the multiples for almost any sector.
Focusing on Transferability: Many small businesses are heavily tied to the owner. By investing in making the business more transferable, buyers will often pay higher multiples as there is a bigger universe of people who can credibly buy and own it. This can be done through transitioning from family members to true third-party employees, hiring a GM, promoting internally, and outsourcing.
Predictable Financial Performance: Consistent and predictable financial performance can attract investors and buyers, leading to multiple expansion. Businesses that can demonstrate sustainable growth and stability are often valued more highly, as there is more confidence in the numbers continuing into the future
Developing a Competitive Advantage: A small business with a unique competitive advantage, such as proprietary technology or a strong brand, may receive a higher valuation multiple due to its perceived strength and growth potential.

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