Suppose there is one measure that allows us to understand a company’s capacity to generate revenues, regardless of funding sources. In that case, it is its EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is used to measure a company’s profitability and financial performance and as an industry benchmark.
It is a crucial variable when considering a merger or acquisition. Private investors always bet on maximizing it. New technologies can be critical in this regard as they allow for automating processes, optimizing operations, and improving efficiency to reduce costs and increase revenues, positively impacting EBITDA.
Indeed, a recent report by BCG shows that digitally advanced companies (the top 25% of the sample) continually outperform those that have transformed less successfully (the bottom 25%) on key financial metrics such as revenue growth and profitability. Since 2019, the gap has widened by 22% in favor of digitally advanced companies. The cumulative value gap will triple to a 66-point margin by 2025.
At the origin is the data
How do new technologies impact EBITDA? Automation is an example. Many companies still have manual processes that are time-consuming and error-prone. By automating them, resources are streamlined, resulting in cost savings. Another example is data analysis to streamline operations and optimize the supply chain.
There is also the possibility of increasing revenues: CRM (Customer Relationship Management) systems provide in-depth knowledge of customers: what products they choose, how and why they use them, and what monetization options exist. This makes it possible to develop timely product and service proposals close to customers’ interests and needs. Profitability then increases and simultaneously enhances satisfaction and customer engagement with new sales.
Moreover, artificial intelligence and machine learning initiatives combined with the right analytical tools are vital to interpreting what is happening in the organization and targeting greater operational efficiency to reduce costs. Among other things, it is possible to improve asset utilization, anticipate equipment failures to avoid downtime, optimize a production line’s performance, or increase human capital’s productivity, to name just a few. In a broader sense, it can positively impact variables such as inventory management, the manufacturing process, or the efficiency of the end-to-end supply chain.
Synergies in multiple portfolios
On the one hand, for PEs that manage multiple organizations, digitalization allows them to generate significant synergies—for example, integrating the procurement operation to define a GPO (group purchasing organization). This brings significant benefits: greater bargaining power, supplier engagement, and better leverage of resources.
On the other hand, the cost, risk, and time-to-market of launching digital initiatives from scratch for each portfolio company are significantly higher than in cases where there is a holistic and strategic vision already aligned with the objectives and purposes of the PE.
This vision must be accompanied by individuals or shared CoEs (centers of excellence) governance. CoEs verify that process function correctly that they are in line with business needs, and that best practices and available tools are implemented to ensure the highest possible performance while complying with all regulatory standards and with maximum security and data protection.
Possible disruption
Digital transformation can also help the exit strategy. In the case of traditional companies, it may raise its valuation closer to that of a technology company (even if the process is unfinished, as this also means more value creation in the future) if an innovative business model is implemented. As a result, the company will be ready to disrupt its segment, which also positively impacts its value.
In conclusion, technology can be a powerful tool for improving EBITDA. By automating processes, leveraging data analytics, and increasing revenue, companies reduce costs, improve their financial performance, stay competitive, and achieve long-term growth. In other words, they become more attractive to potential buyers.