The value-creation library
What each kind of buyer pays for, what evidence they demand, and the proven moves that get a business there.
Every buyer prices a different number
A business has more than one “earnings”. An individual buyer prices what the owner takes home; a private-equity fund prices operating profit with a manager in place; a lender prices cash after debt. Each of these is an anchor, and moving a business from one anchor to the next is a crossing with its own checklist.
- TractionA product people pay for; value rests on the story.
- SDEOne owner’s earnings, on the owner’s word.
- Adjusted EBITDAProfit with a manager in place.
- Cash flow to the firmCash after reinvestment.
- Cash flow to equityCash after debt service.
- Distributable cashA record of payouts.
Seller’s discretionary earnings. What one owner-operator takes out of the business. Priced by an individual buyer, often with an SBA loan, largely on the owner’s word and the tax returns.
Operating profit, adjusted. What the business earns with a hired manager in the owner’s seat. Priced by a buyer who won’t run it personally, on reviewed statements and a filled organization chart.
Cash after reinvestment. Priced by an enterprise buyer that models the business, on a capital-spending history, a working-capital peg and a forecast that has hit its budget.
Cash after debt service. Priced by a lender with a claim on the business, on debt actually serviced and covenants actually met.
What can be paid out, year after year. Priced by a yield buyer, on a record of payouts.
Higher isn’t always better
Each crossing adds cost: reviewed and then audited statements, a management layer, a board, a payout policy. If the buyers a business will actually face price from a lower anchor, that cost never comes back. So the destination is chosen first, from the buyers who can really pay, and only then does any improvement work start.
The four ways a buyer pays less
Every target in the library is tagged with the discount it removes. Knowing which one you are fixing tells you what evidence a buyer will ask for.
- MagnitudeThe number is smaller than claimed. Fixed by a clean trailing-twelve-month profit and loss and an add-back schedule tied to the tax return.
- CertaintyThe number can’t be verified. Fixed by documents a buyer’s analyst can test.
- DurabilityThe number won’t last. Fixed by contracts, coded churn and a business that runs without its owner.
- GrowthThe number won’t grow, or growing it eats it. Fixed by evidence that new investment earns more than it costs.
A fifth discount, for how hard a private stake is to sell, falls on the stake rather than the cash flow; it is computed separately.
How the report uses it
To diagnose
- Which buyers can actually pay the price, and on which earnings measure
- What a buyer’s analyst will ask for first: the data-room list and the quality-of-earnings items
- What is missing to be priced on the next anchor
To prescribe
- Each initiative with its steps, effort and owner
- Who is paid for it, and how the incentive is set
- Marked as improving the economics, or improving the diligence record
That last mark matters. Some work makes the business earn more. Some only makes what it already earns easier to prove. Both are worth doing; they are worth different things, and the plan says which is which on every initiative.
In the sample report, each initiative under an objective carries that objective’s dollars, and each names its owner, cost, odds and the evidence a buyer will see.
- Shape. Five crossings, each from an entry anchor through a chain of intermediate measures to an exit anchor: 21 spans and 58 strategic drivers in all
- Controls. Each driver carries four: a gate before (preconditions), a measure during (progress), a check after (validation) and a safeguard forever (sustainability)
- Placement. A business sits on exactly one crossing: the highest anchor it can defend and the next one it can’t; the first document it can’t produce names where it stands
- Decline. A business sliding back is valued at the highest anchor it can still defend, with the decay list naming what pushed it off
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