Valuing Your Business: What Buyers Look For & How You Can Improve Value

If you are considering selling your business - whether in the near future or several years from now - one of the first questions you are likely to ask is:

“What is my business actually worth?”

While there are various valuation methods and financial formulas available, the reality is that a business is ultimately worth what a buyer is prepared to pay for it.

That decision is based on far more than profit alone.

Experienced buyers will assess the level of risk involved, the sustainability of future profits, and how easy it would be to take over and continue running the business successfully.

Understanding what buyers look for can help business owners strengthen their position well before going to market.

Profit Matters - But “Maintainable” Profit Matters More

Many small and medium-sized businesses are valued using a multiple of maintainable profits.

The key word here is maintainable.

Buyers will want to understand what level of profit they can realistically expect to continue after the purchase. This means they often adjust the accounts to remove unusual or one-off items such as:

• Exceptional contracts

• Insurance payouts

• Temporary spikes in income

• Personal expenses run through the business
  

They may also adjust for owner remuneration.

For example, where an owner-director takes a modest salary alongside dividends, a buyer may recalculate profits based on the cost of employing a fully salaried replacement manager.

The more stable, repeatable and understandable the profits appear, the more confidence a buyer is likely to have in the business.

Predictable & Recurring Income Increases Value

Two businesses with identical profits can attract very different valuations depending on how those profits are generated.

Buyers generally favour businesses with:

• Recurring income streams

• Subscription or retainer models

• Long-term customer contracts

• Repeat business from a broad customer base
  

By contrast, buyers may view the following as higher risk:

• Heavy reliance on one or two major customers

• Project-based work that constantly needs replacing

• Informal agreements without written contracts
  

A business with reliable recurring revenue will often command a higher valuation multiple because future income is perceived as more secure.

Is the Business Too Dependent on You?

One of the biggest factors affecting business value is owner dependency.

If the business relies heavily on you personally - whether for sales, technical expertise, customer relationships or day-to-day decision making - buyers may see this as a significant risk.

Common buyer concerns include:

• What happens if the owner leaves immediately after the sale?

• Are systems and processes documented?

• Can the team operate independently?

• Does the business rely on the owner’s personal relationships?
  

Reducing owner dependency can significantly improve the attractiveness and value of a business.

The Importance of a Strong Team

A capable management team or experienced senior staff can add considerable value to a business.

Buyers often look closely at:

• Staff turnover levels

• Employment contracts and retention arrangements

• Whether operational knowledge is shared across the business

• How dependent the business is on individual employees
  

A business that can continue operating smoothly without constant owner involvement is generally seen as lower risk.

Assets & Financial Health

For some businesses, physical assets such as property, equipment or vehicles may support value and provide reassurance to a buyer.

For others, particularly service-based businesses, the focus may be more on working capital and financial stability.

Buyers will often review:

• Cash flow requirements

• Debtor collection times

• Outstanding liabilities

• Director loan accounts

• Tax compliance history
  

Untidy balance sheets, unexplained transactions or overdue tax issues can create uncertainty and negatively affect negotiations.

Legal & Regulatory Compliance Matters

Before completing a purchase, buyers and their advisers will usually conduct detailed due diligence.

This commonly includes reviewing:

• Company accounts and tax filings

• VAT and PAYE compliance

• Employment contracts

• Licences and regulatory approvals

• Supplier and customer agreements
  

Any areas of non-compliance may increase perceived risk and reduce the price a buyer is willing to pay.

Practical Steps to Improve Business Value

Improving the value of a business rarely happens overnight, but there are several practical steps business owners can take over time.

1. Keep Financial Records Clean & Accurate

Ensure accounts are up to date, consistent and easy to understand.

2. Reduce Owner Dependence

Delegate responsibilities, document systems and strengthen your management team.

3. Secure Recurring Revenue

Where possible, move customers onto contracts, retainers or subscription agreements.

4. Diversify Your Customer Base

Reducing reliance on a small number of customers can significantly reduce risk.

5. Invest in Systems & Processes

CRM systems, documented procedures and operational software can improve efficiency and make the business easier to transfer.

6. Retain Key Employees

Strong employment contracts and retention planning can reassure buyers that the team will remain in place post-sale.

7. Plan for Tax Early

The structure of a sale can have a major impact on the final amount received after tax. Early planning can help maximise value and reduce surprises later.

Final Thoughts

The most successful business sales are often achieved by owners who start preparing long before they actively plan to sell.

Thinking about your business from a buyer’s perspective can help identify areas for improvement and maximise value over time.

At SJC Chartered Accountants, we work with business owners to help them understand the value of their business and prepare effectively for future sale opportunities.

Our services include:

• Business valuation support

• Exit planning

• Tax planning for business sales

• Financial due diligence preparation

• Business restructuring advice
  

If you would like advice on valuing your business or preparing for a future sale, contact the team at SJC Chartered Accountants.