Building the value of a company so that you can sell it on is almost always more tax-efficient than extracting that value through salary or dividends year on year. But a high valuation on paper means nothing if the sale itself falls apart. Getting there requires two things: building the kind of business someone wants to buy and managing the process of selling it properly.
Take control of the process
My advice to business owners hoping to sell is to take control of the process from the start. Building a business, keeping it tidy, and waiting for the right buyer to come a-knocking might feel like the safer option (since it requires no decision-making), but it hands control of timing, price, and terms to whoever happens to show up.
We’ve had several clients spend maybe three months in talks with an interested party only for the deal to collapse because the buyer was never going to pay the price or agree to the terms the seller wanted. The information needed to predict that outcome was usually there from the start. Meanwhile, speculative documentation, financials, and projections cost the seller money to produce but will be out of date by the time a new potential buyer shows up.
The better alternative is to decide in advance what kind of transaction you want, who you want to sell to, and at what price, then go and make that happen. In practice this means issuing an information memorandum to buyers you’ve identified as a good fit. A corporate financier prepares that with you and will also approach prospective buyers, manage due diligence and NDAs, coordinate with solicitors and accountants, negotiate terms, and help structure and close the deal.
This approach puts the seller in control of a process that otherwise controls them. However, none of it works without first knowing what the business is actually worth. The price you’re prepared to hold out for is the first thing to establish before going anywhere near the market.
How businesses are really valued
Different industries have their own norms when it comes to valuations. Service companies are likely to use a percentage of turnover as the go-to method, whereas a manufacturing company would more typically be valued at multiples of its net profit. Without a clear understanding of these industry expectations, you could easily undersell or overvalue your company.
- Asset-based valuation looks at what the business owns – equipment, property, intellectual property, cash, and debtors – minus its liabilities. It tends to produce the most conservative number and is most relevant where the business is asset-heavy or where earnings are inconsistent. So, a growing company is unlikely to be valued by this method, but a company that is not profitable or is in the process of closing down might be more reliant on its asset value.
- Earnings-based valuation, typically expressed as a multiple of EBITDA (earnings before interest, tax, depreciation, and amortisation), is the most common method for trading businesses. A buyer asks, ‘How much profit does this generate each year, and how many years’ worth of that am I willing to pay upfront?’ The multiple varies by sector, size, risk, and growth prospects. A stable, well-run SME in Ireland might command a multiple of anywhere between 3× and 6× EBITDA. A high-growth tech business with recurring revenue might command far more.
- Revenue-based valuation applies where earnings are low or negative but recurring revenue is strong and growing. This is where SaaS companies found their sweet spot for years. It has not disappeared, but the multiples have compressed considerably, and acquirers are a lot more sceptical than they were.
- Comparable transactions means looking at what similar businesses have actually sold for, and it underpins all of the above. In practice, comparable data for Irish SMEs can be thin, which is one reason professional advice matters when you’re going through this process.
It’s also worth noting that business valuations don’t exist in a vacuum but are partly a function of the prevailing interest rate environment at the time of sale. When borrowing is cheap, buyers can finance acquisitions at lower cost, which tends to push multiples up. When rates are higher, the cost of capital rises and buyers expect a faster return, which compresses what they’re willing to pay.
You cannot control the rate environment when you come to sell, but you can control the quality of the business underneath the numbers. A company with clean financials, strong margins, and reliable revenue holds its value across different economic conditions far better than one that only looks attractive in a favourable climate.
Knowing how a valuation is built is one part of the picture. The other is understanding what buyers are actually paying for when they agree to a multiple in the first place.
What business acquirers are looking for
The stickiness principle
Time-tracking software Harvest is an instructive example of the stickiness principle. They were acquired by Bending Spoons, a software consolidator whose model seems to be to acquire products and then dramatically increase the prices. Users have been complaining online of ten-fold or similar price hikes, and I know of at least one client of ours that faced a dramatic change in pricing. The logic is that your data is there, your team knows the system, and changing at the wrong moment is disruptive, so you will stay for at least a while before summoning the will to switch. Bending Spoons didn’t buy Harvest because they believe in it but because it had a big enough user base that there was profit in the inertia. They basically purchased friction.
Recurring revenue with real retention
Buyers want to see revenue that holds – a stable, long-tenured customer base tells an acquirer how long the income stream will last, and that determines what they’re willing to pay for it today. Churn rate will be one of the first things a serious acquirer looks at in due diligence, so a seller needs to know it and be able to explain it. If the churn rate is high, that needs to be addressed before going to market.
Defensibility beyond the product
As I recently discussed in my blog Tech Company Valuations Have Changed, So What Comes Next?, product alone is not enough in the current environment. What else can the business claim? Relationships, reputation, licences, geographic exclusivity, proprietary data, and brand reputation are examples of assets that cannot be replicated in 24 hours. Tech companies are finally learning what the rest of us already knew, that running a sustainable business has always meant earning the right to keep your customers.
Clean financials and a business that runs without the owner
These have always been the foundations of a healthy company. A business that depends entirely on one person (particularly if that person is the owner) carries a significant risk discount. Buyers want to see management depth, documented processes, and accounts that are in order. If your numbers aren’t clean, that will be reflected in the price.
We find it useful to tailor the management accounts reporting pack for the client’s industry, highlighting relevant monthly metrics to view the business from the same perspective as a corporate financier or potential buyer. This also ensures that what we present is in a format that they are familiar with.
What you can do now if you plan to sell
The qualities I outlined above are built over years and cannot be manufactured overnight. The owners who get the multiple they want are usually the ones who treated ‘sellable’ as a standing requirement for the business, not a checklist they worked through once a buyer showed interest. Start taking these practical steps well before you plan to go to market:
- Know your number: Get a proper valuation done so you know what the business is worth now, what’s driving that figure, and what would move it.
- Build things that AI can’t replicate, like customer relationships, long-term contracts, accreditations, and anything that creates a genuine switching cost or barrier to entry. These are where your multiple comes from.
- Tidy the financials: Normalised, clearly presented accounts make a significant difference to how a buyer perceives risk. If you have personal expenses running through the business, or one-off items that distort the P&L, these need to be identified and explained.
- Reduce owner dependency: Even small steps like documented processes, a second person who understands the key client relationships, or a management team that can operate without you in the room improve how a buyer values the business.
- Get advice from someone who has been there: That could be a non-executive director, an occasional advisor, or a small board you convene a few times a year to help you make decisions that will move a valuation.
Remember, by the time you’re sitting across from a buyer, the negotiation is already largely over. The multiple you’ll achieve was determined years earlier, in the decisions you made about how to run the business. The conversation with the buyer is just the moment that the verdict materialises.
If you would like support running your business more efficiently and effectively, we have a range of services that could help. We offer financial health checks, or you may need a more hands-on service such as outsourced CFO or outsourced management accounting. To know more about how we could help, get in touch.
Rory
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