What’s the Single Greatest Tool for Creating Long-Term Value in Your Business?

“A competitor of mine just sold his business.”

I was catching up with Patrick, a CEO friend of mine, who was filling me in that a competitor of his had been acquired by a larger company in their space. The agreed upon price was 10 times earnings before interest, taxes, depreciation and amortization (EBITDA).

When I asked Patrick, what his EBITDA was, he didn’t know.

I then asked Patrick a different question.

“What is the main driver that increases the value for your business”?

Again, he did not know. 

Most CEOs and owners do not internalize knowing their core value driver and thus cannot create the necessary strategy and tactics to scale it. The core value driver for a business can remain constant for a long time but it is also fine to change it. What is not acceptable, is not knowing it. For instance, Home Depot recently changed what they measure for driving economic growth. Home Depot used to be focused on growing total square feet. The more square feet, the more valuable their business. Now, growing economic value for Home Depot is based on total revenue per square foot from just existing stores. That one change has dramatic implications in terms of what Home Depot selects to spend time on and not to spend time on.

Most CEOs and owners know about EBITDA although relatively few actually have the discipline to measure it. As for its importance, last year I interviewed Rory Cutaia, who sold his firm, Telx, to a private equity firm in 2006.  

Rory founded Telx, pioneer of the highly successful carrier hotel Meet Me Room, in 2000. Over the course of only six years, Rory led the business from a start-up worth approximately $5 million to a successful sale and liquidity event priced at over $200 million.

In my conversation with Rory, he extensively discussed measuring and then developing a plan to grow EBITDA as the single greatest tool for entrepreneurs seeking to create long-term value.

Here are my three simple steps to get you started towards understanding what drives value for your business:

1.      Decide on the unit of measure that drives economic value for your business. (It is okay if the unit of measure is not perfect, you can always change it later);

2.      Understand your firm’s EBITDA, and;