- June 22, 2016
Sumus Value Enhancer
The Tool That Clarifies
The Sumus Value Enhancer (SVE) is a tool designed by Sumus to help you understand how your business is valued, and what you can do to increase it. This tool can work in any business because it is based on three simple metrics:
- Operating Profit (EBITDA, or, earnings before interest, taxes, depreciation, and amortization)
- Backlog (B)
- Revenue (R)
An elementary method to value your business is to determine the trailing 12 months of revenue (TTM), and then multiply it by five, which is the average multiple for most businesses in the U.S. It is important to note that multiples can vary widely in different sectors, and even within the same sector, depending on a multitude of factors. Most strategic buyers will pay a multiple of EBITDA and sometimes a multiple of revenue. So if your business has TTM of $1 million EBITDA, then the formula would look like this: $1M (TTM) x 5 = $5M. Put another way, considering no other factors, your business would have a price tag of $5 million.
EBITDA x 5 = VALUE
The SVE takes into account other variables when calculating value, such as your company’s backlog. Backlog is defined by signed business won but not yet commenced or delivered. The SVE uses a unique process on your backlog to determine the company ratio of backlog to book (revenue). A strong backlog to book in the services industry is 2:1, for example, and a weaker ratio would be 1:1. This ratio measures the amount of backlog a company is burning in a given year.
The SVE then examines the gross margin strength in the backlog and determines an average, and then measures that against the gross margin percent of revenue on your income statement. These variables are then weighted and—through the Sumus formula—a multiple of the multiple is determined. Therefore, if your EBITDA and revenue are stable but you have a strong backlog, you can expect to increase your multiple.
If the multiple increases by one, then using the same formula as above, you just located an additional $1 million of company value. Do you think that using the SVE is worth finding $1 million additional value in your company?
EBITDA x 5 + B = Value
An additional component of the SVE process is to examine revenue to determine its strength based on client diversification, gross margins and contract terms. If company revenue is generated by few clients, low margins, and high costs, then the SVE will apply a negative multiple. If revenue is diverse, stable, or growing, and the gross margins are strong, then the SVE will apply a positive multiple. Either way, using revenue as an additional variable in the SVE creates a more accurate and vivid picture. Do you think that applying the SVE to revenue data to uncover hidden company worth is an option you should consider?
EBITDA x 5 + B + R = Value
The SVE Advantage
At Sumus, several factors are carefully considered when advising a client. However, from a financial and strategic value metric, the SVE is a tool used to help determine potential company value in the marketplace. You are urged to seek out the most reliable assistance and advice when making key business decisions, and we have the knowledge and the tools to assist you. Are you ready for the most accurate assessment?