Last week my financial advisor suggested I buy some Apple stock so I picked up a few shares.
Then this happened:
This graph illustrates two things:
1. Never ask me for a stock tip
2. Companies trade on the future, not the past
Today the S&P 500 is trading at around 7.5 times EBITDA. What do you think your company is worth today? Wait, before you answer that, keep in mind the average mid market firm with between $5 – $50 million in revenue trades for about 4-6 x EBITDA these days. Sure there are some outliers on the bell curve but 4-6 times is a decent proxy for most of us.
Why is the S&P trading at 7.5 and you’re at 4-6? The answer is that bigger companies are considered by investors to offer more predictable earnings growth.
Investors buy your company’s future profits so the more you can convincingly show a buyer that your company has the potential to grow, the more you’ll fetch for your business when you’re ready to sell.
Which brings me back to Apple. At $450 a share, Apple is trading at less than 7 times EBITDA — below the S&P average.
Investors figure the product hit parade is over and the house that Steve built will soon become just another bloated tech company with hits and misses just like Microsoft or Cisco.
What does all this mean to you?
If you’re not growing your top line revenue, in the eyes of a buyer, you’re falling backwards. Pecking away at your expenses to get your business ready to take to market is important, but don’t forget to invest in growth. Because without a compelling future, the market may squish your multiple into apple sauce.