Decarbonization Weekly

Industria Insights – Growth that puts more in your pocket

Organic Growth

Prioritizing revenue growth alone is not an adequate strategy for value creation. Long-term value is shaped by sustainability of earnings, free cash flow, and diversity and quality of revenue streams. When considered in the context of a transaction, these characteristics increase enterprise value and maximize shareholder returns.

  • Sustainability: This is perhaps the most important characteristic of high-quality revenue. Companies that have stable revenue streams with clear visibility into future earnings receive premium valuations from investors. Sustainability of revenue is often measured by repeatability of work, long customer relationships (or low churn), and strength of customer contracts.
  • Free Cash Flow: Prioritizing growth of revenue streams that generate high free cash flow creates more long-term value. These revenue streams are typically characterized by high margins and low capital expenditure (capex) requirements. Both corporate consolidators and private equity firms value free cash flow as it allows them to quickly pay down any debt used to acquire a business. As a result, companies with higher free cash flow, all else equal, are valued higher on an EBITDA multiple basis than their counterparts.
  • Diversity & Quality: End market, customer, and vendor diversity and quality are also key considerations for acquirers. Buyers value non-cyclical, high growth end markets coupled with top-tier customer and vendor profiles. These traits help mitigate perceived risk which drives value during a sale. For a more in-depth view on this topic, check out our previous Industria Insight, Should You Be Concentrating on Concentration Risk?

Inorganic Growth

Companies pursuing growth through acquisition, also called inorganic growth, can add meaningful EBITDA contribution while expanding their geographic footprint, service offerings, end markets, and more. For example, companies may acquire targets that are complementary to their own services to create a more vertically integrated end-to-end solution. This can be an excellent way to achieve value while scaling the business, especially if the target company is acquired at a lower EBITDA multiple than the buyer company itself would trade for. However, acquisitive companies should be mindful that the target does not dilute their own multiple down due to end market exposure, capex profile, or something else, such as in the scenario to the right.

Pursuing growth in a strategic, sustainable way fosters long-term value creation, particularly within the framework of an M&A transaction. In this dynamic market, a well-informed strategy combined with tailored, expert guidance is key to achieving maximum shareholder value.

Please feel free to contact anyone on the Industria team. We welcome the opportunity to discuss this article or other market insights gained from our current and recent transaction experience.

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