You’re Running a Better Business on EOS®. Is It Becoming a More Valuable One?
By Cory Mertz, M&AMI, Managing Partner, Mertz Taggart
At a Glance Companies running on EOS® are often already working on the things that make a business more attractive to a buyer, including stronger management, clearer accountability, and less owner dependence. A better-run business and a more valuable business are not the same thing, though. The question worth asking is which of the things you’re working on are actually moving enterprise value. |
Running a Better Business Is Not Quite the Same as Building a More Valuable One
Through our Value Accelerator Program, we have been working with a number of owners recently, including some who run their companies on EOS, and those conversations keep reinforcing the same point: a lot of the things that make a company easier to run also make it easier to sell.
A strong management team, documented processes, clear accountability, and an owner who is out of the middle of every decision all matter. If you run on EOS, none of that will sound particularly new.
Buyers, though, are looking at those things through a different lens. They are not asking whether the company runs good meetings or whether everyone has a clear seat on the Accountability Chart. They are asking a much more basic question: how confident am I that this cash flow will still be here after the transaction?
That question ultimately drives much of the valuation conversation.
A Multiple Is Really a Conversation About Risk
Owners tend to focus on the multiple, which is understandable, since it is the number everyone hears about. A friend sold for six times, someone at a conference heard home care agencies are trading at seven, and a buyer tells an owner they can pay five. The problem is that a multiple without context is not particularly useful.
When we value a business, we first look at the range a company like that could reasonably trade within, based on size, the type of business, buyer demand, and the state of the market.
The harder question is where this particular company belongs within that range, and answering it comes down to two broad categories of risk.
Transferability: What Happens When Ownership Changes?
Transferability is about what happens when ownership changes hands. If the owner is personally responsible for most of the important relationships, decisions, and revenue generation, there is risk in transferring that business to somebody else, and the same is true if there is no management layer underneath the owner or if key processes live in people’s heads instead of in the business. A buyer has to ask what falls apart when this person leaves.
Sustainability: What Happens Twelve Months Later?
Sustainability assumes the business transfers successfully, then asks what happens twelve months later. Is revenue heavily concentrated with one payer, customer, or referral source? Is one employee responsible for a disproportionate amount of growth? Is reimbursement exposed to a meaningful regulatory change? Are recent earnings sustainable?
That is a different set of risks, though buyers care about both, and it is why two companies with the same revenue and EBITDA can have very different values.
Revenue, Margin and Multiple Give You Three Places to Work
At a high level, enterprise value comes down to three variables:
Revenue × Margin = EBITDA
EBITDA × Multiple = Enterprise Value
That sounds obvious on its own. What is more useful is applying it to the gap between what a business is worth today and what the owner ultimately needs it to be worth.
Suppose a business is worth $8 million today and the owner needs it to be worth $15 million before a transaction makes sense. Saying, “We need to create another $7 million of value,” doesn’t give the management team much to work with.
Break it apart, though, and there is something to work on. How much could realistically come from revenue growth? Does the margin need to improve, or is it already where it should be? What is keeping the company from trading toward the upper end of its potential multiple range?
Importantly, those three variables can interact. Growth can do more than increase revenue, since a larger company may also command a stronger multiple. Improving margin can help, but not if the margin is artificially high because the company has underinvested in management or infrastructure. Reducing owner dependence may not change EBITDA at all this quarter, but it may reduce a meaningful source of transferability risk.
That is why it rarely makes sense to manage each of these numbers in isolation.
This Is Where EOS Can Be Especially Useful
Once we understand the value gap, our framework is straightforward:
Gap → Obstacles → Strategies → Actions
That framework connects naturally to EOS. If an owner already runs on EOS, there is no need to invent another operating system for executing the plan. The obstacle may already belong on the Issues List, the strategy may lead to a Rock, and a metric that tells us whether the gap is closing may belong on the Scorecard. The company already has a cadence for deciding what matters, assigning ownership, and following through.
The Value Accelerator adds a different question to that process: how much does this issue matter to enterprise value?
Not every Issue is equally important from that standpoint, not every Rock moves the value of the company by the same amount, and something that feels urgent operationally may not be the thing creating the biggest gap between today’s value and the owner’s eventual goal. That is the piece worth understanding.
Sometimes the Answer Is: Keep Doing What You’re Doing
In one recent Value Accelerator engagement, the owner already had a strong EOS plan in place. We went through the valuation, looked at where the business is today and where she ultimately wants it to be, then broke down the gap.
Her margin was roughly where it needed to be, the infrastructure was strong, and the company was not heavily dependent on her. There were a few risks we identified, including some concentration issues, but nothing that required us to completely rethink the business. The biggest lever was growth, and she already had the growth plan. It was in EOS, the targets were there, and the company was executing against them.
Our advice was not particularly dramatic: keep doing what you’re doing.
What changed is that we could put context around why. We could show how reaching the revenue target might affect EBITDA, why additional scale could also influence the multiple, and which risks were worth watching along the way. We could also connect the company’s operating plan to the owner’s financial objective, which is valuable even when the answer is not that you need to change everything.
The Goal Is Not to Create More Rocks
This is probably worth saying explicitly: the purpose of looking at a company through an enterprise-value lens is not to manufacture more work for a leadership team that already has plenty of it. The goal is prioritization.
If you have ten Issues, which two or three could materially change what a buyer sees? Which Rocks directly address the biggest value gap? If the 10-Year Target is $30 million in revenue, do you know what a $30 million company might actually be worth, and is that enough to accomplish what you personally want from the business?
Those are different questions than the ones most operating systems are designed to answer, and they are worth asking while you still have time to do something with the answers.
Know Your Number Before You Need Your Number
Most owners do not wake up one morning eager to start an M&A process; usually something changes first. Burnout catches up with them, a health issue comes up, a partner wants out, the reimbursement environment changes, a buyer makes an unsolicited offer, or they simply reach the point where they are ready for something different. That is a difficult time to discover the business is three years away from being where you need it to be.
If you run on EOS, you already have a disciplined way to work on the business over time, and the opportunity is to make sure some of that work is also building toward the outcome you eventually want as an owner. You do not have to be ready to sell; in fact, that is really the point.
Be ready before you’re ready. Know your number, know the gap, and know the path.
Key Takeaways
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If you’re curious how your current operating plan translates into enterprise value, a confidential valuation conversation is a reasonable place to start. Mertz Taggart has spent over twenty years advising healthcare services owners through hundreds of transactions. Sometimes a valuation exposes a meaningful gap, and sometimes it confirms you’re already doing exactly what you should be doing. Either answer is useful.
Mertz Taggart is not affiliated with, endorsed by or sponsored by EOS Worldwide, LLC. EOS®, Accountability Chart®, Rocks™, Scorecard™ and related marks are trademarks of EOS Worldwide, LLC.
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