Skip to main content

For more than a decade, Marvin Morris ran his company the way many entrepreneurs do: hand to mouth. Every dollar earned immediately went back into the business, In-Person Payments, a Wayne, N.J., firm that runs payment centers in inner city stores that allow people without checking accounts to pay their bills.

"Once we made enough money, we'd hire someone," Morris says. Marketing, advertising, and expansion efforts were financed in the same bootstrapping fashion.

The strategy served Morris well. By last year, In-Person Payments had revenue of nearly $18 million, 55 employees, and facilities in 3,000 stores in 20 states. But each time Morris, 56, presented a venture capital firm with his financials, it responded with a valuation that struck him as shockingly low.

The VCs were impressed with In-Person's ability to grow so quickly with so little capital. They also liked that the company's customers were mainly Hispanic, a fast-growing segment of the American population.

The problem, they said, was the company's low EBITDA -- or earnings before interest, taxes, depreciation, and amortization. That threw Morris a bit because EBITDA was not a number he had ever paid much attention to. His eye had always been on revenue. Since that number had trended solidly upward for nearly 11 years, so had his company's value, he figured.

But for nearly all institutional investors, including private equity firms and VCs, EBITDA is a deciding factor in determining whether to invest. It's essentially revenue minus expenses, without figuring in one-time-only accounting quirks -- and lets investors determine a company's profitability, regardless of industry or accounting methods.

"If you're trying to get investors, it's smart to maximize your EBITDA in every legal way you can," says B.J. Rone, a turnaround expert with Tatum Partners, an Atlanta provider of temporary CFOs.

"If you're trying to get investors, maximize your EBITDA in every legal way you can."

Scroll to Continue

TheStreet Recommends

Yet many entrepreneurs fail to take the number into account, says Joseph Hadzima, a senior lecturer at MIT's Sloan School of Management. Why? Some small firms seek to reduce paper profits (and, as a result, EBITDA) to minimize their taxes; others, including many highly innovative technology companies, focus on fast revenue and market-share growth above all else.

But if your company, like In-Person Payments, has moved beyond the start-up phase, you'll find it nearly impossible to get venture backing if you have low EBITDA, says John E. Mack, CEO of investment bank USBX. You'll get a better valuation, he says, if you can cut expenses and improve your EBITDA before talking to investors.

That's exactly what Morris set out to do. He cut wherever he could, yanking more than $100,000 from his marketing budget, putting off large purchases and expansion plans, and focusing on increasing the profitability of current operations. Labor was one of his largest costs, so he dismissed 35 people, nearly half of his staff. It wasn't easy to do. "I was candid and up-front," he says. "I told them it was important to the future of the company." The company even negotiated a lower rate on its phone service.

The increase in EBITDA was almost immediate. The company went from running at breakeven last year to posting $1.4 million in EBITDA this year. Investors have been just as impressed: Morris is close to inking a $3.5 million deal with a small venture firm for a minority share -- about 25% -- of the company.

The funds will help Morris take his company national. And as he does so, he'll be more conscious of costs than ever before. Says Morris: "I've learned to find that balance between growth and profitability."

Bobbie Gossage is a writer at Inc. magazine. This article was originally published in Inc.

Click here

to try a risk-free issue of Inc. magazine.