What Does Catalyst Mean?
A catalyst refers to an event that has occurred in a company, typically within the last 12 months, that would significantly increase its valuation. The value of a company is based on its future ability to generate free cash flow. Therefore, a catalyst usually improves future sales and free cash flow, resulting in a higher implied valuation both because of the better future performance and also because of a better implied multiple.
Divestopedia Explains Catalyst
A seller must prove that a catalyst delivers sustained performance that recurs every year. If the pop in performance does not recur, then buyers are likely to normalize it out of results since the benefit would not accrue to them post-transaction.
Some example of catalysts that would deliver a higher valuation would include:
- The acquisition by the seller of a company throughout the last 12 months that delivers proven, additional EBITDA to the combined entity;
- The successful introduction of a product or services into a new market where the market penetration, pricing and margins, and overall staying power has been proven;
- The proving out of a new, game-changing technology;
- Winning a significant, multi-year new contract with an existing or new client with good margins; and
- A significant move by several new clients or a large dominant client into the company's existing market where it is reasonably certain that additional revenue will be captured.