Forvis Mazars Capital Advisors has the good fortune of seeing many business owners do extraordinary things. Many are founders who started with very little, while others acquired established businesses and built them into elite enterprises. Our investment banking team is privileged to assist in the sale of 20 to 30 businesses annually. Through this, we are active participants in helping businesses of comparable profiles, and often in the same industry, sell for meaningful premiums relative to their peers.
There are many factors that influence superior valuations, but we often find that firms garnering the highest values are those rich in excellence, and we embrace the responsibility to “monetize excellence.” Regardless of the industry setting, striving for and achieving broad-based excellence can significantly impact a business’s attractiveness in the market and value.
There is a deep universe of buyers who treasure, seek out, and pay for top quartile and top decile companies. These companies of excellence have a history of outgrowing and outearning their peers, and there is often a clear path to continued vibrancy and success. Furthermore, there is often an advanced and rewarding future when the subject company’s skilled and driven leadership team is united with a capital-resourced, accomplished, and growth-oriented buyer/investor. The exponential growth profile is the impetus to a competitive environment where “inspired” buyers are willing to compete and win. Buyers will pay for elite performance, as the risk and return dynamics can weigh heavily positive.
Our firm collaborates closely with our clients to fully identify and quantify a client’s scope and depth of excellence. Sometimes, the excellence inventory is deep and readily apparent, while other times it is developing and less evident. When a history of top quartile growth rates and margin achievements is apparent, there is usually a carefully planned and executed strategy of innovation, leadership, and performance in place.
Our task is to strive to identify the baseline of these cultural and purposeful pursuits and how strengths have been uniquely utilized at organizations. Once identified, our teams work to help quantify and articulate achievement. Positioning, and doing so with data, is a critical objective to help our clients be rewarded for their commitment to differentiation and success.
A recent residential services client is a prime example of capitalizing on a deep portfolio of excellence. This subscription, route-based business had an attractive growth profile and recurring revenue model that was deeply treasured by both the private equity industry and larger, established strategic buyers. This client recorded growth rates nearly triple the industry average, alongside a margin profile that was materially higher than industry norms. With modest fixed and working capital investment requirements, this offered a highly accretive free cash flow model. Although double-digit EBITDA multiples were common in this industry, our team knew this client was different and worthy of its own valuation metrics based on its consistently growing revenues and earnings.
As is often the case, the founders were extremely talented, driven, and brand-focused. The founders were also sponges for learning and they were always seeking a better path and higher earnings. Profitability was a continuous pursuit, and they knew they had to be a best-in-class performer, while maximizing operating efficiencies. The owners purposely challenged and changed their business model over three decades of ownership, including shelving low-margin, capital-intensive services. This allowed them to focus on their core business, building a team of professionals, and instilling a high-impact customer service model.
The company’s growth was influenced by several factors. For one, it had its own customer call center that answered every inbound call with a live operator. The company also had an in-house marketing and sales team that was incentivized to add to its more than 20,000 customer list annually. With industry-leading customer gains (and low customer churn) and consistent price increases, the company achieved an eight-year revenue compound annual growth rate of 15%. This client excelled at marketing, sales, and performance, which helped position the company as both a market pricing leader and customer growth leader.
In addition to this, the client was datacentric and measured everything in its operations. The company invested heavily in technology and adopted the premier operating system for its industry. This system provided the company with the ability to explore every customer activity, precisely budget, and make apt, rewarding investment decisions. The client’s facilities were pristine and located on high-traffic interstates, serving as the ideal billboard for the brand. The fleet of service vehicles also utilized technology through GPS equipment and docked iPads that offered technicians turn-by-turn instructions for every stop, and direct information on the services to be offered at each of its daily stops. Moreover, the vans’ work beds were custom built with every unit decked in the same way.
This client displayed excellence throughout its organization. As an advisor, Forvis Mazars Capital Advisors was tasked with helping the client monetize this excellence. Our team collaborated with the client in creating a well-rounded buyer list. We ultimately had nearly 80 confidential information memorandums distributed and received 21 indications of interest. Seven of these offers were at least several turns above our targeted valuation multiple, and we competitively negotiated a valuation that was roughly 50% higher than the multiples achieved in recent industry transactions.
Hopefully, this client’s experience reflects the value of being a firm of excellence, and the rewards that often accompany unmatched performance. Planning with a purpose and performing with precision can be rewarding, even if shareholders intend to maintain long-term, generational, ownership. While our client’s level of excellence was unique, they are not alone. Our firm continues to see exceptional companies perform in extraordinary ways.
As expected, these elite companies achieve superior valuations. We encourage businesses to do their part by instilling a pursuit of excellence as a cultural foundation throughout its organization. Excellence often perpetuates consistent, top-tier financial results and can lead to a superior monetization event.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.