Creating Value by Improving EBITDA

Investors look for companies that have “value”, but what does that mean? Value comes in many forms. It can be talent, intellectual property or concepts. However, the most often it is the earnings potential of a business.

Specifically, buyers or investors or will look at a company’s EBITDA. This is its earnings before interest, taxes, depreciation and amortization. It is deemed one of the most important measures of a company’s profitability. The higher the EBITDA margin, the more attractive a company is to investors.

7 Step Solutions supports businesses enhance their EBITDA in a number of ways. Here are a couple:

Product Pricing

Profitability is determined by more than just sales volume. If a company’s products are flying off the shelves but are priced too low then they are doing themselves a big disservice. An investor isn’t likely to fund their company either. They might not notice the negative effects of undervaluing their product right away, but as their company grows, they will discover that their pricing model cannot sustain their business.

It is important to price a product based on how much it is worth to the customers, not merely how much it costs to produce it. It is key that a company does its research. This makes the company more valuable to potential investors and it shows that they have a capable leader / marketing team, too.

Lowering Operational Costs

High operating costs lower a company’s EBITDA. Companies are often hesitant to embrace the idea of lowering operating costs because it can often mean laying off employees. However, there are many other ways to lowering operating costs without reducing headcount.

• Check for areas of inefficiency that can be corrected with new policies and procedures.
• Update technology to automate and increase productivity and efficiency.
• Negotiate with suppliers for better rates or find new suppliers that will save money.
• Location strategy – Does everyone need to be in the office and does the company need to be based where it currently is. Moving to a less expensive location might be a wise decision.
• Cut down on travel and entertainment expenses.
• Outsource back office / non-core functions such as payroll, IT support and facilities management