To increase the value of your business, focus on the seven drivers buyers price: (1) gross margin and pricing power, (2) independence from the owner, (3) recurring or contracted revenue, (4) clean, exit-ready financials, (5) working capital discipline, (6) management depth and banking relationships, and (7) reduced customer, supplier and key-person concentration. Start with a valuation and a Target Valuation, then work the list over 12–36 months.
By John H. Barnes, CFP®
“How do I increase the value of my business?” is the question I get asked most, usually about eighteen months later than I’d like.
Here’s the answer nobody wants: revenue is not value. I’ve watched a $12 million company sell for less than a $7 million one, and both owners were shocked. The $7 million owner had spent three years making the business worth buying. The $12 million owner had spent three years making it bigger.
Buyers don’t pay for size. They pay for a stream of future cash they believe will keep showing up after you’ve left. Everything that makes that stream bigger, safer or more predictable raises your price. Everything that makes it depend on you, on one customer, or on luck lowers it.
So this is the list. Seven value drivers, roughly in the order a buyer’s analyst will look at them, with what to do about each. If you’re twelve to thirty-six months from a sale, this is the work. If you’re not planning to sell, do it anyway. A business that’s worth more is a business that’s easier to own.
First, know two numbers
Before you improve the value of your business, you need to know what it’s worth today and what it needs to be worth.
The first number comes from a real business valuation, not the industry-multiple-times-EBITDA guess, but a look at your financials the way a buyer’s team would look at them, including the adjustments they’ll make that you haven’t thought of.
The second number is what I call your Target Valuation: the price the business has to sell for to fully fund the life you want after it. Take what you need to live on, subtract what you already have outside the business, gross it up for taxes and the deal costs, and you have a target. Most owners have never done this math. When they do, one of two things happens: relief, or a timeline.
The gap between those two numbers is the job. Here’s how you close it.
1. Gross margin: because gross margin is pricing power
If I could only see one number from your financials, I’d ask for your gross margin. Not revenue. Not even net profit.
Gross margin is what’s left after the direct cost of delivering what you sell. It’s the purest measure of whether the market values what you do enough to pay for it. A business with 55% gross margins has pricing power; a business with 22% is a commodity, and buyers price commodities like commodities.
What to do: Pull three years of gross margin by product or service line (if your books can’t do that, see #4). Find the lines that are below your average and ask why. Then take the uncomfortable step: raise prices on the bottom third of your customers, or fire them. A 3-point improvement in gross margin on a $10 million business is $300,000 of additional profit a buyer will pay a multiple on, and, more importantly, it’s evidence the business can hold its price.
2. Owner independence: the business has to run without you
This is the value driver that hurts the most because it’s about you.
Ask a buyer’s analyst what they check first and it’s this: what happens to the revenue if the owner walks out? If the answer is “the top ten customers follow him,” “she’s the only one who can quote a job,” or “he approves every invoice,” then the buyer isn’t buying a business. They’re buying a job, and they’ll pay accordingly, often with a big chunk of the price held back as an earn-out that you’ll have to stay and work for.
What to do: Take a real two-week vacation and write down everything that broke. That’s your list. Then, in order: get a second person on every key customer relationship; document how you price; hire or promote someone who can run operations day to day; and set up financial reporting so that someone other than you knows the numbers (see #4). Henry, a client who owned a thirty-year-old printing company, had already put executives in charge of daily operations before we started. It’s a big part of why he sold to a private equity group at a premium to comparable deals.
3. Recurring and contracted revenue
A dollar of revenue that’s under contract, on subscription, or from a customer who’s bought every month for six years is worth more than a dollar you have to go win again in January. Buyers model this explicitly. Two businesses with the same profit will sell for different multiples if one has 60% of revenue recurring and the other has 10%.
What to do: Figure out your real recurring percentage, and be honest about what “recurring” means. Then look for ways to move revenue into that column: maintenance agreements, retainers, multi-year contracts with price escalators, a service tier on top of a product. In trucking and logistics, it’s dedicated lanes and contracted freight over spot. In services, it’s retained clients over projects. Even a modest shift changes how the buyer sees the whole business.
4. Clean, exit-ready financials
I’m going to be blunt: most business owners’ books are built for the IRS, not for a buyer. They’ll tell you what you spent. They won’t tell a stranger why the business is worth buying.
A buyer’s due diligence team wants three years of financials that reconcile, categories that match how the business actually runs, a clear separation of business and personal expenses, and a set of “add-backs” that are defensible instead of hopeful. If they find a mess, two things happen: the price drops to cover the risk, and the deal slows down, which kills more sales than bad numbers do.
There’s a second reason this matters: your P&L is probably lying to you about cash. Profit on paper and money in the bank are different things, and the gap is where growing companies get hurt. Clean books with a working cash flow forecast fix both problems at once.
What to do: Have your books kept by someone who thinks like a finance person, not a compliance person: outsourced accounting that reports against a budget and forecast, uses categories designed for your decisions (by service line, by division, by entity), and keeps the statements to bank-and-buyer standard every month. When the buyer asks for three years of clean financials, they should already exist. When a bank asks, same answer.
5. Working capital discipline
Working capital is the blood circulating in the business body: the cash tied up in receivables and inventory, minus what you owe your vendors. Every dollar you put into people, inventory or equipment starts a timer that doesn’t stop until the customer pays. The longer that cycle, the more cash the business needs just to stand still, and the more a buyer will have to leave inside it at closing.
That last part surprises owners. In most deals, the buyer sets a working capital “peg,” the normal level the business needs to operate, and if you deliver less than that at closing, it comes out of your price. A business that collects in 30 days instead of 60 is worth more twice: once because it’s less risky, and again because the peg is lower.
What to do: Measure your cash conversion cycle. Tighten AR: invoice on delivery, not at month-end; shorten terms for new customers; isolate the chronic slow payers and fix the contract or fire the customer. Manage AP so you’re not paying vendors faster than customers pay you. If inventory is part of your business, find the slow-moving third and stop buying it.
6. Management depth and a second banking relationship
Two drivers here that buyers lump together as “how fragile is this?”
Management depth. A business with a real second layer, an operations lead, a sales lead, a finance person, is worth more than one with an owner and a group of helpers. It’s #2 from a different angle: it’s not just that you can leave, it’s that there’s evidence someone else can lead.
Banking. Quick quiz: how many banking relationships should your business have? The answer is not one. A company with a single bank, a single line of credit and a lender who’s never met the second-in-command looks fragile to a buyer, and, more practically, gets worse terms. Two relationships mean competition for your business, a backup if the first bank’s appetite changes, and a stronger story about how the company is capitalized.
What to do: Get loan-ready before you ever call a bank: clean financials, a forecast, a one-page summary of the business. Then approach two or three lenders at the same time and let them compete. On management, promote or hire one person this year whose job is to make you less necessary. Put their name on the org chart the buyer will see.
7. Customer concentration and the risks you can name
Every buyer’s model has a line for concentration risk. If one customer is more than 15–20% of revenue, the price gets discounted. If one supplier could shut you down, or one employee holds the knowledge that keeps a product line running, same thing. These are the “five silent killers” I’ve written about before: the risks that don’t show up on the P&L but come straight off the offer.
What to do: List the top ten customers and their share of revenue. If the top one is over 20%, growing the others is now your top sales priority, not because that customer is bad, but because the dependence is. Do the same for suppliers and for people. For each risk, write down the mitigation: a second supplier qualified, a process documented, a customer contract extended. Buyers don’t expect zero risk. They expect that you know your risks and have done something about them.
Putting it together: the 12-to-36-month plan
If you’re serious about increasing the value of your business before a sale, here’s the sequence I’d follow.
Months 1–3. Get the valuation and set the Target Valuation. Fix the books (#4); nothing else on this list can be measured until that’s done. Measure gross margin by line, cash conversion cycle, recurring revenue percentage and customer concentration. Now you have a baseline.
Months 4–12. Pricing and margin (#1). Working capital (#5). Start the owner-independence work (#2): the customer relationships and the pricing documentation. Open the second banking conversation (#6).
Months 12–24. Management depth (#6). Move revenue toward recurring (#3). Attack concentration (#7). Re-run the valuation and see how far the gap has closed.
Months 24–36. Prepare the business for sale: the multiyear financial story, the deal team, the decision about who the buyer is: family, key employee, partner, strategic, private equity. By now the number should be at or near the target, and you’re negotiating from preparation instead of from surprise.
A word on doing this without selling
Everything above makes the business better to own, not just better to sell. Higher gross margin is more profit today. Owner independence is a vacation. Recurring revenue is a January you don’t dread. Clean books and a cash forecast are the end of watching the bank balance and hoping.
Your business is very likely your largest investment, whether you treat it that way or not. The owners we work with who’ve built the most value are the ones who started treating it like one long before they had a reason to.
If you’d like to know where your business stands on these seven, that’s a conversation we have every week. Let’s talk.
John H. Barnes, CFP®, founded Pendleton Street Business Advisors in Columbia, South Carolina, in 2013 after eight years at Wachovia Bank and a role as COO of a capital advisory firm. The firm provides fractional CFO, valuation, exit planning and outsourced accounting services to owners of $5M–$50M companies across the Southeast and the U.S.