Valuation is often the most challenging part of a sale, and the most important. Price it too high and the business sits. Price it too low and you leave money on the table. Here are the five factors that do the most to move the number.
1. Real, documented earnings
Buyers buy cash flow. For most small and mid-sized businesses, value starts with seller's discretionary earnings or EBITDA, recast to add back one-time costs and owner perks. The key word is documented. Earnings you cannot show in your books and tax returns are earnings a buyer and lender will not pay for.
2. Dependence on the owner
If customers, suppliers and employees all rely on you personally, a buyer is purchasing a job, not a business. Owners who build a management layer and document how things run sell for more, and more easily.
3. Customer concentration and recurring revenue
A business with hundreds of customers and repeat or contracted revenue is worth more than one where a single customer makes up a large share of sales. Service agreements, maintenance plans and subscriptions all raise value.
4. Growth and industry demand
Buyers pay for where a business is going. Steady growth, a healthy pipeline and an industry that acquirers are actively consolidating, such as home services, push value up. Declining trends push it down.
5. Financeability and deal structure
Most buyers borrow to buy. A price that an SBA 7(a) lender will finance is a price that can actually close. Structure matters too. Seller financing, earn-outs and rollover equity can raise the total value an owner receives.
Other factors buyers weigh
- Condition of equipment and facilities
- Lease terms and location
- Quality and tenure of the workforce
- Reputation and online reviews
- Legal, regulatory or licensing issues
Rules of thumb are a starting point, not an answer
Industry multiples you read online are averages across very different businesses. A valuation built from your financials, your market and real comparable sales is the only number worth negotiating from.
Find out what your business is worth. Our valuation consultation is complimentary, confidential and draws on more than 40 years of experience.
