What Increases Business Value? (How to Sell Your Business for More)

What Increases Business Value? (How to Sell Your Business for More!)

If you're considering selling your business, either now or down the line, you've likely come across the fact that most business transactions are valued as a multiple of what the business earns.

The earnings "metric" used to determine that multiple is typically either Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or Seller's Discretionary Earnings (SDE).

You’ll usually look back at the last three years of financials and apply a multiple to the average EBITDA or SDE from that period. In some cases, one year might be weighted more heavily than another.

But here’s the kicker: the multiple used to determine your business’s value can vary significantly.

This happens because there’s no one-size-fits-all formula for buying and selling businesses. The multiple depends on several factors, which we’ll go over in this article.

Since the multiple plays such a critical role in determining your business’s value, the next big question is: what affects this multiple? How big can the multiple be, and, most importantly, how can you increase it?

What Drives a Multiple?

Size

The larger your earnings, the higher the multiple that can be applied. For example, if a business is doing $250k in SDE, you’ll likely see a multiple around 2x-4x. Most small businesses fall within this range, except for those in high-demand industries (e.g., SaaS, tech).

On the other hand, a business with $5MM in EBITDA might see multiples in the 6x-10x range. Again, this varies by industry and other factors specific to the business.

But here’s the key takeaway: multiples are not solely tied to earnings or industry alone.

So, one of the most effective ways to increase your multiple is to boost your bottom line.

Revenue Growth

Another critical factor that can increase your business’s value is consistent revenue growth. If you can show steady growth over the past 3-5 years, it’s a huge plus. Buyers love stability and predictability. Whether your business grows at 5%, 10%, or even 20% year over year, that track record can be very attractive to potential buyers.

Businesses with fluctuating or inconsistent revenue can be a red flag. If you have a down year, it might be worth considering whether you can push that year out of your 3-5 year window to improve your valuation. One down year might not kill the deal, but it could lower the price.

Clean Financials

Having clean, organized financial records is absolutely essential. Buyers want to see clear Profit & Loss statements for the past 3-5 years, along with tax returns and balance sheets, no surprises.

Sloppy or messy books can lower the value of your business or even kill a deal. If your records are disorganized, how can a buyer trust that there aren't hidden issues they’re unaware of? As a business owner looking to sell, it’s crucial to clean up your books, line by line, and have everything ready for potential buyers.

Management Team

Now, let's talk about non-financial factors that can drive up the value of your business. Having a strong management team in place is a key factor. If your business is reliant on the owners for generating revenue or managing key relationships, it’s much harder to sell, and it limits the pool of potential buyers.

Focus on building a strong leadership team, especially department heads and operators. When the business can run effectively without heavy reliance on ownership, you’ll find that more buyers are interested.

Recurring Revenue or Contracts

Lastly, recurring revenue or locked-in contracts can significantly boost the value of your business. This adds a layer of stability and predictability that buyers are willing to pay more for. This goes beyond just customer contracts—having stable supplier or vendor contracts also provides predictability on the expense side of things.

These are some of the strongest factors that influence the multiple applied to your business. Of course, there are always other variables that come into play, and each deal is unique. But if a business owner can focus on these five areas, especially clean financials and a strong management team they’ll be well-positioned to command a higher asking price.

Remember, businesses that are positioned well in these key areas are highly valuable and valuable businesses sell. No matter the industry or market conditions.

If you’d like to discuss your business in depth and understand how to maximize its value before selling, feel free to reach out to us at Kelliher Acquisitions. We’d be more than happy to help you prepare for the highest possible exit price!