The value of a business increases when it generates sustainable profit, grows year over year, operates even without you, and has clean, reliable books. These are the four pillars. You don't need to have a plan to sell the business to take care of them. A valuable business is simply a healthier business—even for you, the one running it today.
The first pillar is sustainable profitability. One good year doesn't convince anyone. Three years of steady profit show that the business isn't a fluke. That's why hidden or unexplained fluctuating profits reduce value, even when the amount looks good.
The second pillar is growth. A business that grows, even slowly, is worth more than a business that stays in place. Growth shows that the market wants what you're offering and that there's room for more.
The third pillar is owner independence. John Warrillow, author of the book Built to Sell, puts it simply. A business that depends on the owner isn't a business; it's a job. If clients only seek you out, if every decision has to go through your phone, then the buyer can't buy anything, because the most valuable asset walks out with you. Every task you teach your team and every client you train to work with your company, not with your name, increases value.
The fourth pillar is systems and clean books. Written procedures, proper contracts, financial statements that tell the truth. When the numbers are reliable, any conversation about value becomes easier—with a buyer, a bank, or a new partner.
Two bars in the same neighborhood in Tirana each make 3,000,000 LEK in profit per year. At the first bar, the owner opens and closes every day, the suppliers know only him, and he keeps the recipes in his head. At the second bar, a trained manager runs things; the recipes and orders are written down, the books are kept regularly, and the owner can go away for two weeks of vacation without a hitch. When a buyer shows interest, for the first one he offers a little more than the value of the equipment, because if the owner leaves, the business goes too. For the second one he offers several times the annual profit, because he's buying a machine that runs on its own. Same profit, completely different value. The difference wasn't created on the day of sale. It was created over years of working with systems.
In the Resource Center you'll find the owner independence test. There are 10 simple questions, such as whether the business can run for two weeks without you and whether your biggest clients have contact with anyone other than you. The result tells you which pillar to strengthen first. You can find it at Resource Center.
In practice, the value of a small business is built as normalized earnings multiplied by a multiple that varies according to risk. The four pillars above are not rhetoric; they are the factors that drive the multiple. Two measurable metrics are worth calculating for each client. The first is the weight of recurring revenue—revenue from contracts or regular customers—divided by total revenue. Warrillow places this at the center, because the buyer is paying for tomorrow's revenue, not yesterday's. Second, customer concentration, the weight of the largest customer in terms of revenue. When a single client accounts for 15 to 20 percent of revenue, any prudent buyer treats it as a risk and discounts it from the price. Normalized earnings are addressed separately on the valuation metrics page.
Because anything that increases value benefits you even today. More sustainable profits, less dependence on you, cleaner accounts. Even if you never sell, one day you'll want to retire, take out a loan, or leave it to your children. You'll need the value in all three cases.
Usually 2 to 3 years of steady employment. Buyers and banks look at the record, not promises. So the best time to start is today, even if a sale is nowhere in sight.
If you want a calm assessment of where your business stands on the four pillars, talk to us. Find us at Contact page.
We take care of accounting and taxes, so you can save time, money, and focus on growing your business.
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