Multipliers Make Pricing More Attractive to Owners

I recently presented a pricing program to a private equity firm in Cleveland. The early part of the presentation focused on pricing leverage. That is, how pricing can positively impact profit margins. While this point is well known among many, I take the theory a step further in my presentation and calculate how price improvement can lift the valuation of a firm.

Most private equity firms have a keen eye toward the financial performance of their portfolio companies. This private equity firm is no different. I presented a conservative example of how a $50 million company with a 6.8% EBIT could see a 1% improvement in price realization lift the value of the company by $2.5 million. That is, the potential selling price of the company would increase by $2.5 million because we estimated that the multiple on earnings to derive at the value of the company was 5.

A 5 multiplier is a very conservative number in today's market. My friends at the private equity firm suggested that today's multipliers are between 7 and 8, and may even reach as high as nine.

So, what does this mean for the value of our example firm?

Using a multplier of seven, we find that a 1% improvement in pricing revenue, assuming all other profit drivers remain unchanged, lifts the value of the firm by $3.5 million. That's an additional one million dollars in the pocket of the owners or shareholders.

With multipliers climbing the time to consider price improvement moves may never be better.