Driving Growth (and Valuation) through Operational Excellence

In the M&A market, operational efficiency has a direct impact on EBITDA multiples, risk profiles, and overall buyer appeal. For experienced investors, advisors, and business owners, streamlining operations is a clear way to enhance enterprise value. Here’s a closer look at targeted efficiency methods that elevate valuation in today’s competitive landscape.

Resource Utilization and Optimization

Move beyond just basic “automating” and “digital transformation” to initiatives that drive actual operational results and margin improvements. For example, implementing data-driven demand forecasting and optimized resource scheduling can drive reduced downtime, reduced working capital needs, and better resource utilization. Successful initiatives like these, especially compared to direct competitors, signal to buyers in due diligence a durable competitive advantage and continued margin improvement. 

Deep Understanding of Cost Structure

A lean cost structure can significantly improve profit margins and enhance valuation. Tools like activity-based costing (ABC) help businesses identify inefficiencies and focus on higher-value opportunities. For instance, a mid-sized manufacturing company used ABC to analyze its product lines and discovered that a rarely ordered component accounted for 20% of production costs but generated only 5% of revenue. After recognizing the rarely ordered product did not drive cross-sell revenue or new demand, the company discontinued the component and reallocated resources to a high-demand, higher-margin product, reducing production costs by 15% and achieving a 12% increase in EBITDA. These changes not only improved profitability but also made the company more attractive to buyers during due diligence.

Investing in Future Growth

Businesses that invest in long-term areas, such as customer success management or R&D, could strengthen future revenue potential and lifetime customer value. These allocation choices reflect forward-thinking management, a quality buyers may value when assessing future cash flow potential. Caution needs to be taken here and companies would need to demonstrate customer success management and R&D actually lead to improved customer retention, revenue staying power, and/or improved product margins. 

Culture of Continuous, Data-driven Improvement

Organizations with a culture focused on operational excellence are adaptive and proactive. Having internal audits on key processes, for example, could help uncover inefficiencies and improve productivity. A professional services firm implementing weekly audits reduced project delivery times by 20% for new clients, leading to higher client retention—a leading indicator of stable revenue valued by buyers.

Operational Excellence as a Valuation Multiplier

Operational excellence contributes to valuation by bolstering EBITDA, reducing risk, and supporting scalability. Buyers consider these improvements not only for immediate financial benefits but also for their impact on reducing risk and enabling growth. Excellent, efficient operations show disciplined management and future-ready adaptability, traits that can drive a premium valuation in M&A through higher EBITDA figures and multiples. 

For further insights on strategies to increase value through operational improvements, see "An Entrepreneur’s Guide to Understanding Business Valuation."