A buyer’s offer comes from a spreadsheet, and that spreadsheet runs on a short list of financial metrics that set the multiple applied to earnings. Most of those metrics are within an owner’s control given enough lead time.
For owners 12 to 24 months from a sale, that lead time is the window to review the key financial metrics to assess before selling a business and fix the weak ones before a buyer ever sees the books.
Small businesses are usually valued as a multiple of seller’s discretionary earnings (SDE), which is net profit plus the owner’s salary, benefits, and other add-backs. Larger companies are typically valued on EBITDA.
Consider a business producing $400,000 in SDE. At a 2.5x multiple, it sells for $1 million. At 3x, it sells for $1.2 million. That half-point often comes down to how the business performs on the metrics below.
Buyers and lenders want three years of stable or growing revenue. A strong year followed by a dip raises questions about which year reflects the real business. Seasonal swings tied to tourism are normal on the Emerald Coast, and buyers familiar with the region account for them. Unexplained year-over-year declines lower offers.
Margins get compared against industry norms, and add-backs get scrutinized. Every personal vehicle, family phone plan, or one-time expense an owner adds back needs documentation. Without it, a buyer’s accountant will strip the add-back out and the SDE shrinks with it.
Revenue from service agreements, contracts, and memberships is more predictable than one-time sales, and buyers pay more for predictability. A landscaping company with 60% of revenue under annual maintenance contracts will typically draw a stronger multiple than one that bids job by job.
When a single customer accounts for more than 15 to 20% of revenue, buyers price in the risk of losing that account after the sale. Heavy concentration can also lead to earnouts, where part of the purchase price depends on future performance.
If key accounts depend on the owner’s personal relationships or labor, buyers see revenue that may leave with the seller. This usually shows up in deal structure through longer transition periods, seller financing, or earnouts.
With 12 to 24 months of runway, owners can move several of these numbers:
A business broker can review the last three years of financials and pinpoint which of these metrics is holding the multiple back while there is still time to fix it before listing.
If you’re ready to explore the sale of your business, reach out to the experts at Murphy Business – Emerald Coast. With their experience in business sales, they can help you navigate the complexities and guide you to make the right decision at the best time. Contact them at (850) 374-8884 or complete their contact form to get started on your business succession journey.
