Many business owners believe that the value of their business is simply: EBITDA × a factor. However, if you ever seriously consider a sale, investment, or growth, you’ll discover that a large part of the value lies in the value drivers—in other words, the quality of your EBITDA.
The factors that determine how attractive, scalable, and transferable your business is. Here are the 6 most important ones—and why you should start focusing on them today:
1. Profit is important ... but only if it is sustainable and also leads to healthy cash flow
It’s not your accounting profit that counts, but your normalized profit. Buyers and investors look at:
- Structural, predictable earnings capacity and cash-flow
- Incidents that don't recur
In short: what is sustainable profit and cash flow?
2. Growth = value (but only if it is scalable)
A growing business is more attractive. But only if that growth is not dependent on—or only minimally dependent on—additional costs:
- Speaking of subscriptions or repeatable sales processes
- Plenty of potential for cross- and upselling
- Growth without linear cost growth
Smart growth = higher price
3. Not all revenue is equal
- Revenue is valued differently depending on its quality:
- Recurring predictable revenue versus projects/single
- Good customer spread
- Contract duration, lasting customer relationships and customer loyalty
Predictable revenue = less risk = more value
4. How dependent is the business on you?
The classic in SMEs: you are the business. For a buyer, that's a risk:
- Relationships too tied to you as owner
- Knowledge not secured
The less indispensable you are, the more the businesses are worth. Make sure you have a strong management team and reduce the businesses’ dependence on you.
5. Differentiation Makes the Difference
Why would someone want to buy your business—and not your competitor’s? Consider:
- Strong brand or name in the marketplace.
- Niche position
- Innovative capability
- Unique technology or proposition
The harder you are to copy, the higher your value
6. Risk ultimately determines price
The final price is based on return versus risk. Note:
- Legal and Tax Risks
- Dependence on suppliers or markets
- External factors (legislation, industry development)
The lower the risk = the higher the value
Note that the value of your business is not determined at the time of sale, but in the years before. Today, give yourself a score of 1-10 on these 6 value drivers.
That simple insight is often the starting point for serious value creation.
