Let’s kill off a myth: there’s no magic formula for business value. The final price is always a mix of science, art, and good old-fashioned negotiation. In this article we share what buyers and sellers need to know about business valuations during a business transaction process.
Maintainable earnings (and why it matters)
Buyers want to know: Once the vendors walk away, how much free cash flow will this business keep generating? That’s “maintainable earnings” - the true, recurring profit of the business, stripped of non-business-as-usual items that commonly appear in SME financials.
It takes a skilled advisor to assist with reviewing the earnings quality of a business. Higher-quality earnings result in more reliable maintainable earnings, and buyers are consistently willing to pay a premium for that certainty.
The power of preparation when selling a business
The market has shifted: private equity and sophisticated buyers are now often outbidding trade buyers, but they’re picky. Often times it pays to hire an advisor to assist with preparing a quality of earnings review when considering a business sale.
Buyers are focused on:
- Proven earnings (no hiding weak months or “seasonal” spikes) that are of high quality and are maintainable.
- Confidence in the numbers (monthly reporting, clear stories behind the figures).
- Explanations for the upside—as well as transparency about any shocks along the way.
The negotiation game
Multiples (“6x EBITDA,” “2x Revenue”) get thrown around, but the real driver of the Multiple is earnings quality and defendable margins, often a reflection of the following:
- How clean are the numbers?
- What proportion of total revenue is recurring?
- What are the barriers to entry?
- How replicable is the process/product?
- What is the pricing power of suppliers?
- What is the future expected growth and risk of the industry?
What really matters is earnings quality, defensibility, and growth prospects. Turning this into a defendable narrative for a business sale requires fine tuned negotiating skills. Experienced corporate advisors can assist you here.
The Takeaway When Selling Your Business
A smart seller who has their books in order, understands their industry and competition, has their growth story straight, and isn’t afraid of tough questions will be well positioned to maximise their value. That’s how you attract higher offers, partner with quality buyers, and drive the price up.
If you’re thinking about selling your business (next week or even five years from now), our Transaction Advisory team is here to help. No pressure, no jargon. Fill in the form below and we’ll get in touch for a confidential, straight-shooting chat about your options.
