Quick answer: The most reliable ways to raise what a buyer will pay are to make earnings more certain and easier to verify: reduce dependence on the owner and on a few customers, build recurring revenue, keep accurate and timely financial records, and document how the business runs. Growth helps, but a buyer pays more for earnings that look dependable. Most of these changes take a year or longer to show in results, so the work should begin well before a sale.
Key points
- Start with the biggest source of doubt. Fixing the single risk a buyer would discount most is usually worth more than improving something that is already a strength.
- Buyers reward what they can verify. A change counts when it appears in several periods of results, so timing matters.
- Avoid actions that raise this year’s profit at the expense of next year’s. Cutting maintenance, marketing or hiring to inflate earnings is spotted in diligence and costs credibility.
- Improvements to earnings and improvements to the multiple compound. Both add value, and together they add more than either alone.
Think in terms of risk, not only profit
Owners often respond to the idea of raising value by trying to raise profit. Profit matters, but price is profit multiplied by a multiple, and the multiple reflects how much the buyer trusts the profit to continue. Anything that reduces a buyer’s doubts can lift the multiple, and anything that raises earnings lifts the figure it is applied to. The overview of the factors that drive value lays out where doubt comes from.
A useful first step is to imagine a skeptical buyer reviewing the business and to list what would worry it. The list is the work plan.
Where to focus
| Action | Why it moves value | How long it takes to show | Effort |
|---|---|---|---|
| Accurate, timely, reviewed financials | Buyers can verify earnings and diligence is shorter | Months | Moderate |
| A documented add-back schedule with support | Protects the earnings figure from being challenged | Months | Low |
| Reducing owner dependence | Raises confidence that earnings will survive the sale | A year or more | High |
| Broader customer base and longer contracts | Lowers concentration risk and improves visibility | A year or more | High |
| Recurring or contracted revenue | Makes revenue predictable and raises the multiple | A year or more | High |
| Margin and pricing improvements | Raises earnings directly | Months to a year | Moderate |
| Documented processes and systems | Lets a new owner run the business | Months | Moderate |
| Legal and compliance housekeeping | Prevents surprises and delays in diligence | Months | Low to moderate |
| Managing working capital and capital spending | Avoids a dispute over the peg and deferred spending | Months | Moderate |
Make the numbers trustworthy
Buyers pay for earnings they believe. Monthly closes completed on time, financial statements that match tax returns, clean separation of personal and business expenses and a schedule of adjustments with support all raise credibility. The add-back guide shows what buyers accept, and the guide to quality of earnings shows how they test it. If the books are cash-based or inconsistent, converting them to a standard accounting basis before the sale shortens diligence.
Reduce dependence on yourself
If the business needs you, a buyer will either discount it or tie your payment to staying. The remedy is to build a second layer: hire or promote managers with authority, introduce them to key customers and suppliers, and document the decisions that only you now make. A test is to take time away and see what breaks. The guide to key-person risk covers the steps in detail.
Broaden and lock in revenue
Two features of revenue earn a premium: it is spread across many customers, and it is repeatable. The customer concentration guide explains the first. For the second, look for ways to convert one-time projects into service agreements, subscriptions, maintenance contracts or multi-year supply arrangements, and renew expiring contracts early where terms favor the business.
Improve margins deliberately
Pricing, product mix and purchasing offer room in most businesses. Review prices against costs, drop unprofitable customers or products, renegotiate supplier terms and track margins by customer and by job. Improvements that rest on specific, repeatable actions are credited by buyers. Those that rest on a single good quarter are not.
Tidy the foundations
- Contracts. Put verbal arrangements in writing, check for clauses that restrict assignment or give a counterparty rights on a change of control.
- Intellectual property. Make sure the company owns what it uses, with assignments from employees and contractors.
- Licenses and permits. Confirm they are current and transferable.
- Employment matters. Classify workers correctly and keep agreements and policies current.
- Equipment and facilities. Address deferred maintenance, since buyers deduct for it.
- Insurance and claims history. Keep records organized.
The seller’s diligence checklist shows what buyers will request.
Things to avoid
- Starving the business to raise profit. Cutting maintenance, training, marketing or hiring raises earnings briefly and shows up as a decline later.
- Changing accounting policies. Revenue recognition or inventory method changes before a sale look like manipulation, even when they are not.
- Pulling sales forward. Shipping early to customers or offering heavy discounts distorts the periods buyers study.
- Making big, one-time commitments. A major capital project or a long lease can make the business harder to sell.
- Neglecting the business to prepare for the sale. A dip in results during the process gives the buyer a reason to renegotiate.
Illustrative example: Earnings and multiple, separately and together
A company has adjusted EBITDA of $2,000,000 and a buyer would pay 5.5x, or $11,000,000. In three scenarios, the owner improves different things.
| Scenario | EBITDA | Multiple | Value | Change |
|---|---|---|---|---|
| Today | $2,000,000 | 5.5x | $11,000,000 | |
| Raise earnings by 10 percent | $2,200,000 | 5.5x | $12,100,000 | +$1,100,000 |
| Reduce risk, raising the multiple | $2,000,000 | 6.0x | $12,000,000 | +$1,000,000 |
| Both | $2,200,000 | 6.0x | $13,200,000 | +$2,200,000 |
The multiples are invented to show how the effects add and compound, and are not benchmarks.
Sequence the work
Begin with what takes the longest and matters most, typically dependence on the owner and on a few customers. Run the faster items, such as financial clean-up, in parallel. Revisit the plan with a valuation at intervals, so that the effect on price can be seen. Timing the sale to follow a period of strong, documented results is covered in the guide to when to sell.
Frequently asked questions
How far ahead of a sale should I start?
As early as practical, and ideally years before. Buyers look at trends over several periods, and changes such as building a management team or diversifying customers take time to show. If a sale is closer, focus on cleaning up the financial records and documenting the business, which can be done in months.
Should I invest in growth or in making the business less dependent on me?
It depends on which is the larger source of doubt for a buyer. For many owner-run businesses, reducing dependence on the owner and on a few customers raises the multiple a buyer is willing to pay, while growth raises the earnings the multiple is applied to. A valuation can show which has more effect on your business.
Will buyers pay for changes I made just before the sale?
Less than for changes with a track record. A new contract or a price increase that is signed and in effect can be credited. A plan, a hire made last month or a projected savings is credited far less, because the buyer is paying for results it can see.
Is it worth getting audited or reviewed financial statements?
It can be. Statements prepared or reviewed by an outside accountant raise a buyer’s confidence in the numbers and shorten diligence. The cost should be weighed against the size of the business, and a sell-side financial review is an alternative that targets the issues buyers focus on.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- What Drives the Value of a Business: The Factors Buyers Weigh: Buyers pay for future cash flow and discount it for risk. See the factors that raise or lower what a company is worth, from earnings quality to owner dependence.
- Key-Person Risk: How Owner Dependence Affects Valuation: How buyers measure owner dependence, why it lowers value and shapes deal structure, and what an owner can change in the years before a sale to reduce it.
- Customer Concentration and Valuation: How Buyers Price the Risk: Why buyers pay less for businesses that depend on a few customers, how they measure concentration, and what owners can do to reduce the discount before a sale.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- When to Sell Your Business: Signals, Timing and Readiness: How to judge when to sell: personal goals, business performance, buyer demand and readiness, with a scorecard and the alternatives to a full sale.
- How to Prepare for a Business Valuation: A Practical Checklist: What to gather and decide before a business valuation: financials, add-back support, customer data, owner role and liabilities, and why each matters to a buyer.
- How a Buy-Side Acquisition Process Works: From Strategy to Integration: The stages of acquiring a company: criteria and sourcing, outreach, valuation, the letter of intent, diligence, financing, the purchase agreement and integration.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.