The three numbers a buyer looks at first
Why two businesses with the same revenue can be worth very different amounts, and the three numbers that explain most of the gap.
By Owners often talk about revenue. Buyers look past it quickly. When a buyer first looks at a small service business, three things tell them most of what they need to know about value and risk.
1. Real, repeatable profit
Buyers want to know what the business earns once one-off items and owner-related costs are adjusted, and whether that profit is steady year to year. A business with consistent profit is worth more than one with a single great year.
Tidy records that show where every add-back comes from make this number believable.
2. How well profit turns into cash
Some businesses look profitable but always seem short of cash, because customers pay slowly, stock builds up or big bills land at awkward times. Buyers look at how quickly profit arrives in the bank.
Chasing debtors earlier and asking for deposits improves this faster than almost anything else.
3. How much the business relies on you
If every quote, key customer and hard decision runs through the owner, a buyer has to price in the risk that things change when the owner leaves. That reliance is often the single biggest factor in value.
Documenting how things are done and handing real decisions to capable staff reduces it over time.
Why the same revenue can mean very different value
Picture two businesses with the same turnover. One has steady profit, customers who pay on time and a supervisor who runs the crews.
The other has lumpy profit, slow payers and an owner who does everything. A buyer will value the first much more highly, because its future is more predictable.
The good news is that all three numbers can be improved, usually well before a sale.
Your checklist
What to do next
- Work out adjusted profit for the last three years
- Check how many days customers take to pay
- List the decisions only you can make
- Pick one area to improve this quarter
Example
An HVAC owner found his average customer was paying in 52 days. By invoicing on completion and following up at seven days, he brought it under 30. The business's profit didn't change, but its cash, and its appeal to buyers, improved noticeably.
An illustrative example, not a real client or transaction.
Questions owners ask
Is revenue irrelevant then?+
Not irrelevant, but on its own it says little about value. Profit, cash and owner reliance matter more.
Which of the three is easiest to fix?+
Usually cash conversion. Earlier invoicing and follow-up can make a difference within weeks.
How long does reducing owner reliance take?+
Months, not days. Start with one area, such as quoting, and build from there.
Important
This article is general information only. It doesn't take your personal circumstances into account and isn't financial, legal, tax, employment or valuation advice. Velaro Group is a buyer of businesses. It isn't a business broker, licensed financial adviser, registered tax agent or law firm, and it doesn't act for sellers. Please get advice from your own accountant, solicitor or financial adviser before making any decision. Read the full disclaimer.
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