“Look for companies with high profit margins.” — WARREN BUFFETT
In the land of private equity metrics, EBITDA has reigned supreme for years. It’s the basis for valuing businesses, a proxy for the overall health of a company, and the subject of many useless debates over its pronunciation. EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation.
As you might expect, the higher you drive your company’s EBITDA margins—which happens through some combination of growing revenue and reducing costs—the more profit you’ll make, the more attractive your business will be to potential buyers like Buffett. At the fundamental level, businesses can improve margins in either of two ways: 1) by reducing current costs (which I’ll shorthand as “cost reduction”) or 2) minimising future costs that need to be added as the company grows (which I’ll shorthand as “scalability”)
Keys to Success in Driving Margin Expansion
Success Factor #1: Align spending and investing decisions to the overall strategic objectives. (You already have this sorted, right?
Success Factor #2: Favour lasting cost efficiencies over short-term cost-cutting. (If you haven’t read the Infinite Game by Simon Sinek, put it on your list)
Success Factor #3: Invest early to drive long-term margin expansion. The power of compounding matters!
Success Factor #4: Think structurally, not just incrementally.
Success Factor #5: Teach managers throughout the organisation to think like investors. This will make them think about the ROI of their spend.
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The information on this website is general in nature and does not consider your personal situation. You should consider whether the information is appropriate to your needs and, where appropriate, seek professional advice.
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