The 8 Characteristics That Drive Business Valuation

Did you know that only around 20-30% of companies that go to market sell? Among these, only a small fraction will sell at premium valuations.

If you would like to maximize the selling price of your business, it’s crucial that you embrace the perspective of a professional buyer and be able to objectively evaluate your business. Drawing from our experience selling businesses valued between $5M to $100M, we’ve learned that buyers will compete to acquire businesses that exhibit the following attributes.

1. Accurate and Comprehensive Financials

Companies that invest in Reviewed/Audited financials are viewed as more trustworthy. Their commitment to having an impartial third party analyze their financials instills confidence in buyers. Ensure your financial records are professionally prepared and expect to be asked to provide comprehensive financials monthly.

2. Recurring Revenue Streams

The allure of businesses with consistent revenue from subscriptions, contractual arrangements, and automatic payments is undeniable. Buyers favor businesses with dependable income sources, as they carry lower risks. This could involve long-term agreements featuring automatic renewals, maintenance contracts, or product/service warranties. Exploring ways to integrate recurring revenue components is time well spent and will likely boost your business valuation.

3. Sustained Business Performance

If your company can demonstrate stable (or increasing) revenues and earnings over the past 3+ years, it will likely command a premium. Buyers would far prefer to see a business doing $1M EBITDA per year than a business that does $2M one year and loses money the next. Again, buyers seek predictability.

4. Favorable Macro Environment

Buyers take a forward-looking approach, seeking assurance that the external environment will remain favorable. While you have limited control over market conditions, it’s essential to make a compelling case to buyers for why your business will be poised to thrive well into the future.

5. Customer Base Diversity

Buyers place higher value on companies that aren’t overly dependent on a single customer. It’s important to ensure that no one client generates more than 25% of your annual revenue, or buyers will likely reduce their business valuation or shift a portion of the purchase price into contingent consideration or an “earn-out.” Earn-outs have been known to be contentious after closing, so it’s best to avoid them if possible.

6. Bench Strength

Businesses with middle management or a dependable “second-in-command” who is willing to stay on board are more attractive than those where vital knowledge and relationships exit with the previous owner. A litmus test is whether the business can run smoothly during a three-week absence of the owner.

Related: The Top 6 Seller Misconceptions in Mergers & Acquisitions

7. Niche Positioning

Buyers seek unique attributes that can’t be easily replicated. It’s essential that you can articulate the top 3-5 features of your business to differentiate you from your competition. Warren Buffett calls this differentiation your “moat” and you should be able to clearly tell this story to prospective buyers.

8. Documented Playbook

Companies with documented policies, procedures, employee roles, and clearly organized agreements will command a premium business valuation. Demonstrating this level of precision in your business instills buyer confidence and bolsters their willingness to bid high.

As you prepare your business for sale, we strongly recommend engaging with an experienced M&A Advisory firm that can help you increase the odds of your successful transaction. Our new ExitBoost™ service is designed to help you prepare your business to sell for maximum value. Through ExitBoost, you’ll receive a confidential assessment including a baseline business valuation, benchmarking analysis, salability scorecard, and actionable recommendations.

Based on successfully helping other clients increase their valuations by 20-140%, we are confident we will add value along the way and make your business more sellable for when you and the business is ready. At Kinected, we are proud of our 86% close rate on transactions we take on and are enthusiastic about helping you unlock your next chapter. Feel free to reach out – we’re here to help.

Kevin Berson

Kevin Berson

Mergers and Acquisitions (M&A) Advisor | Business Broker

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