Drive Margin Expansion
Contributor Dan Cremons
By Dan Cremons
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 pronuncia-
tion. (Is it EE-buh-duh? Ee-bit-DA? EH-buh-dah? The world may never know.)
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, and the more attractive
your business will be to potential buyers like Buff ett. At the most rudi-
mentary level, private equity-backed companies can improve margins in either of two ways: 1) reducing current costs (which I’ll shorthand as
“cost reduction”), or 2) minimizing future costs that need to be added as a
company grows (which I’ll shorthand as “scalability”—a grossly overused
term, but one that’s fitting for this purpose).
Keys to Success in Driving Margin Expansion
Success Factor #1: Align spending and investing decisions to the over-
all strategic objectives.
Success Factor #2: Favor lasting cost efficiencies over short-term
cost-cutting.
Success Factor #3: Invest early to drive long-term margin expansion.
Success Factor #4: Think structurally, not just incrementally.
Success Factor #5: Teach managers throughout the organization to think
like investors.
“Sometimes, it is more difficult to achieve a 10% cost
reduction than it is to tell people they have to achieve
50%. Small, incremental steps block your view of doing
something fundamentally different.” —ECKHARD PFEIFFER, Former President and
CEO of Compaq
Hope you enjoyed this article !
See ya in the inbox !
Sebastian Amieva
Investor / M&A Expert / Mentor
Brought to you by my friend, Scott Oldford
Scott Oldford is one of the top online business mentors and advisors and he also owns dozens of businesses that collectively generate tens of millions of dollars a year in multiple niches, countries (and even languages), across the world.
In his new "Investing with Scott" newsletter, he gives you a behind the scenes look into acquiring, building and scaling businesses based on his experience of helping 100's of Entrepreneurs scale past 7 & 8 figures.