We just completed a business valuation for a client and they had a fantastic year in 2021. Their revenue increased by 13% in 2020 and then by 31% in 2021. Our conclusion: The business is worth less now than it was before the revenue growth. Our valuation of the company was based off a multiple of the established earning power of the business (commonly referred to as EBITDA). The percentage of EBITDA dropping to the bottom-line decreased from 21% in 2019 to 13% in 2020 to a projected 10% in 2021. The business made less money in 2021 while doing close to $1,000,000 more in revenue.
The owner of this business is not a bad or negligent owner, they just need to refocus their efforts. 2020 and 2021 both represented an extremely difficult time for small business owners with stay-at-home orders, shipping delays, and increases in product costs to name a few. Navigating this storm shifted focus away from improving the business to just surviving the ever-changing landscape. None of these issues have been completed resolved, but hopefully as a business owner you are now in a place where you are confident that you can handle anything and you can get back to improving your business. Pay particular attention to your margins because while you were figuring out how to survive the last 2 years, your costs likely increased a significant amount and those changes need to be identified and corrected in order to preserve the value of your business.