By Eugene E. Valdez AKA The Loan Doctor
In my current walk as a banking & finance consultant more often than not many of my clients are seeking expansion financing to grow their businesses to increase their annual EBITDA, (earnings before interest, taxes, depreciation and amortization.) This is a common goal because in the back of their mind many of them are thinking about selling their business at a future date and they know that their EBITDA times their industry multiple is a general indicator of the value of their business.
Obtaining the “right kind of financing,” (loan type & size) with the “right commercial bank” is a critical variable in the pursuit of maximizing your EBITDA. The wrong kind of financing can prevent a business owner from taking advantage of incremental sales opportunities whether it be with core customers or through the expansion into new geographic markets or with the development and sale of new products or services.
My advice: If you want to increase the value of your business enterprise over time, be very picky which commercial bank you decide to do business with because it could cost you millions in the future. For example; let’s assume your industry multiple is 5. The Bank A relationship helps you post an EBITDA of $1,500,000, 3 years from now. The Bank B relationship lacked the proper financing size and thus you posted an EBITDA of $1,200,000, 3 years from now. The Bank B relationship may have cost you $1,250,000 in future business value ($250,000 less EBITDA times 5). Ouch.
Don’t pick the bank that has the nearest branch or the biggest advertising budget. Vet your bank and banker meticulously.
In addition to picking the right commercial bank here are some other factors that can influence the value of your business.
- Solid customer relationships with very high retention rates
- Proprietary products or services which are legally protected
- Diversified customer base with no concentrations in excess of 10.00%
- High quality management team
- Highly competent employees, with low turnover
- Consistent, stable operating trends both in terms of revenues, earnings and resulting EBITDA
- Equipment and business facility/plant in good condition
- High quality accounting / financial statements both internal and external (for external, CPA audit, preferred)
- Clearly identified business niche with a strong basis of differenation
- Processes that exhibit automation and efficiency for cost control
Good luck in increasing the value of your business!!
Eugene Valdez is a 40-year veteran of business/financial management and owner of The Loan Doctor, a full service business loan consulting firm based in Upland. He can be reached at email@example.com.