Ep. 407 — Ken Sanginario: Where the Multiple Comes From, and How to Double It

6 min read

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Episode Summary

A broker quotes you a five multiple. Someone at your peer group brags about getting eight. Your CPA shrugs. And nobody in the room can tell you where the number actually comes from. That’s the gap I brought Ken Sanginario on to close. Ken founded Corporate Value Metrics, built the Value Opportunity Profile, and is one of the few people on the planet who can walk an owner-operator through the buildup methodology without losing them in the math. We got into the cost of equity buildup (risk-free rate, equity risk premium, size premium, and the company-specific risk you actually control), why your effective cost of debt isn’t the coupon rate your banker quoted you, and how the Weighted Average Cost of Capital (WACC) becomes the inverse of your multiple. Then we ran the numbers: a million of Normalized EBITDA at a 20% company-specific risk profile is a 3.7x company. Cut that risk to 10% and the same cash flow becomes a 7x company. The work happens across eight functional areas, and almost every owner reinvests in the wrong one.

Top 10 Takeaways

  1. Buyers don’t pay for what your business did. They pay for what it will do. Prove the story.
  2. Revenue, profit, and cash flow are outputs of quality, not direct levers you chase.
  3. The multiple isn’t pulled out of thin air. It’s the inverse of your cost of capital, minus growth.
  4. Cost of equity builds up: risk-free rate, equity risk premium, size premium, then company-specific risk.
  5. Company-specific risk runs 2% to 25%. It’s the one lever you actually control.
  6. Your effective cost of debt isn’t your coupon rate. Personal guarantees and blanket liens have a price.
  7. Higher quality means more debt capacity at lower rates, which lowers your blended cost of capital.
  8. Cut company-specific risk in half and you can double the multiple. Cash flow growth comes along for the ride.
  9. Eight functional areas have to be in balance. Your weakest one is the constraint, not your strongest.
  10. Owners reinvest in their passion areas. The blind spots stay blind, and the constraint never moves.

Sound Bites

“There’s this economic train wreck that is just bearing down on us over the next 10 years or so, and not enough people are focused on it.” (@00:04:04) — Ken Sanginario

“Too many business owners and advisers treat revenue growth, profitability growth, cash flow growth as direct levers. They are not.” (@00:18:28) — Ken Sanginario

“I’ve never met an owner-operator who can’t tell one hell of a story. They know where they’ve been, they know where they are, they know where they want to go. And then I go, okay, prove it. And they go, huh.” (@00:25:30) — Ryan Tansom

“We’ve doubled the multiple basically effectively by reducing the risk. We’ve gone from a three and a half to a seven.” (@01:14:32) — Ken Sanginario

“Where most business owners make a colossal mistake is they will invest in the areas of the company that they’re most passionate about, which are typically the areas where the company is already strongest.” (@01:23:18) — Ken Sanginario

About This Episode

Ken Sanginario is the founder of Corporate Value Metrics, creator of the Value Opportunity Profile (VOP), and the architect of the Certified Value Growth Advisor (CVGA) certification program. His framework comes out of decades in the trenches as a turnaround consultant, private equity advisor, and CFO across dozens of industries, walking into rooms where payroll was three days away and deciding whether the company had a pulse. Ryan went through Ken’s CVGA certification in 2017 and credits Ken with much of his technical foundation on the buildup methodology, cost of capital, and the eight functional areas that drive company-specific risk. This is one of the most technical conversations on the show — built for the owner who’s tired of being told the multiple is “whatever the market will bear.”

Resources Mentioned

  • Corporate Value Metrics — Ken’s firm, training, software, and advisory services. — corporatevalue.net
  • Value Opportunity Profile (VOP) — Software platform that assesses company quality across eight functional areas and translates it into the cost of capital and the multiple.
  • Certified Value Growth Advisor (CVGA) Certification — Ken’s certification program for advisors who want to help owners grow transferable value.
  • Ken Sanginario on LinkedIn — linkedin.com/in/ksanginario
  • Profit First by Mike Michalowicz — Referenced in the resource list.
  • The Great Game of Business by Jack Stack — Referenced in the resource list.
  • DISC for Business — The behavioral framework Ken’s eight functional categories are built on.

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