When some people hear the word predictable, they think “boring” or “not exciting.” But for someone looking to buy a business—and for the bank financing that purchase—predictable has a very different meaning. Words like steady, lower risk, and safe quickly come to mind. When we as Business Brokers / M&A Advisors are talking about predictability, what are we looking at?
- Revenue. The top line of your profit and loss statement. In the three to five years leading up to a potential sale, buyers like to see revenue that is consistent or steadily increasing. Large swings in revenue create uncertainty and reduce a buyer’s confidence in their ability to forecast future performance. When Revenue is stable or trending upward, buyers feel more confident that their efforts to maintain or grow sales will pay off.
- Gross profit margin. This is calculated as revenue minus your cost of goods sold. Depending on the industry, COGS could be cost of inventory sold, raw materials, or in some industries production labor costs. Like Revenue, Gross Margin should be steady or increasing. When gross margin fluctuates significantly from year to year, it signals to buyers that the business may struggle to manage rising labor or material costs. While factors like tariffs or minimum wage increases can make this challenging, buyers place a high value on businesses that can maintain relatively consistent margins over time.
- Earnings. Many owner-operated businesses try to minimize taxable income, and owners often worry this will reduce the value of their company. The good news is that brokers adjust, or “recast,” financials to reflect the earnings the business truly generates regardless of ownership. This adjusted figure is known as Seller Discretionary Earnings (SDE). For larger businesses with a full management team and less owner involvement, EBITDA (earnings before interest, taxes, depreciation, and amortization) is typically the more appropriate measure. Whether using SDE or EBITDA, what matters most is consistency. Buyers focus closely on earnings as a percentage of revenue. Just as we discussed previously on Revenue and Gross Profit, Earnings, as a percent of revenue, should be steady or increasing. Predictable margins help them understand what portion of future growth is likely to flow to the bottom line.
- Balance sheet. Significant fluctuations in assets or liabilities often raise questions for buyers and lenders. These swings can signal potential working capital issues and uncertainty about the cash required to keep the business operating smoothly.
At the beginning of each year, we see valuation discussions ramp up. Right now we’re having a lot of meaningful conversations with clients about not only what their business is worth, but what they can do to strengthen that value and improve marketability. When you’re ready to talk about your business, we’re here for a confidential conversation.
