How to increase the value of your business before a sale

Value is earnings times confidence

A buyer pays for two things: the earnings they expect the business to produce after they own it, and their confidence that those earnings will arrive. Nearly every method of valuation reduces to some version of that pair, whether it is expressed as a multiple of EBITDA, a capitalisation rate or a discounted forecast. Increasing value therefore means improving one or both.

Most owners focus on the first and neglect the second. Yet for a small business, the difference between a buyer applying a low multiple and a higher one can be worth more than several years of profit growth, and it depends on factors that are within the owner's control.

The drivers a buyer actually prices

Transferability comes first. If customers, suppliers, staff and know-how are attached to you rather than to the business, a buyer is purchasing a job with a risk that the earnings leave with you. Documented systems, a second-tier manager and customer relationships held by the team all reduce that risk.

Recurring or contracted revenue is priced above one-off project work because it is predictable. Customer concentration is priced heavily: one customer contributing a large share of revenue is a single point of failure, and margins matter both for the earnings figure and as evidence of pricing power. Clean, reconciled records, a secure lease with options to renew, written contracts with key customers and suppliers, and retention arrangements for key staff each remove a reason for the buyer to discount. Our guide to business goodwill explains why these factors are what goodwill actually consists of.

Improving earnings versus improving the multiple

Improving earnings and improving the multiple are different projects with different payoffs. Earnings improve when you lift prices, cut waste or win customers. The multiple improves when you reduce risk and increase transferability. The illustration below is hypothetical, and every figure in it is assumed for the example.

In the example, reducing risk adds more value than growing profit, and the two compound. The multiples are assumed and are not a forecast of what any buyer will pay, but the shape of the result is what an owner should expect: work on the multiple is usually the larger lever for a business that is owner-dependent or concentrated.

Why timing matters: 12 to 24 months of evidence

Buyers price evidence, not intentions. A new manager hired last month does not yet demonstrate that the business runs without you, and a contract signed last week does not yet show recurring revenue in the accounts. Most of the drivers above need one to two full financial years in the record before a buyer and their adviser will give credit for them.

That is why the work should start 12 to 24 months before a sale. It also allows time for a price rise to flow through, for a lease to be renegotiated, and for the accounts to show clean, consistent results rather than a last-minute improvement that a buyer will treat with suspicion. Working capital deserves attention in this period too, as described in our guide to working capital, because a buyer will expect a normal level to be included in the price.

What not to do

Do not inflate earnings with aggressive add-backs. Every adjustment will be tested in due diligence, and a schedule of doubtful items damages your credibility on the sound ones. Do not defer necessary costs such as maintenance, marketing or hiring to flatter the last year's profit. A buyer's adviser looks for exactly that pattern, and a deferred cost becomes a price reduction.

Avoid introducing unusual related-party arrangements in the run-up to a sale, such as moving costs into another entity or setting rent with a related landlord at a non-market rate. They complicate the normalisation, raise questions about what else has been arranged and can have tax consequences you should discuss with your tax adviser. Do not lock in long contracts on unfavourable terms simply to show recurring revenue, and do not stop investing in the business because you are leaving it.

Get a baseline valuation early

A valuation at the start of the process tells you where value sits today, which drivers are holding it back, and what a realistic outcome looks like. It gives you a benchmark to measure the work against, and it identifies problems while there is still time to fix them rather than during a buyer's due diligence. A valuation is not the same as the sale price, for reasons set out in our guide to valuation versus sale price, but it is the reference point that lets you negotiate from a position of knowledge.

Where to start this month

Write down every function that would stop if you took three months off, and start assigning each to someone else or to a documented process. List your customers by revenue share and identify what it would take to reduce the largest. Check the expiry and options on your lease. Reconcile the accounts to the bank and the BAS so that the record is clean from here forward.

Then get the baseline. Valuation Group prepares signed business sale valuations for owners across Australia, from $1,495 + GST for suitable, straightforward matters, with a draft typically 5 to 7 business days after all requested information is received. Contact Jackson Wilson for a free first conversation about where your business stands and what would move it.

General educational information. Examples are hypothetical and do not value a real business. The appropriate treatment depends on the purpose, evidence and agreed scope.