Many business owners are likely to only sell their enterprise once!
The risk here is they only really learn what buyers truly care about too late, namely once the transaction has happened.
Some owner managers to go market expecting a life-changing valuation, only to then find potential buyers questioning:
This can all lead to a dangerous end result... The business sells for less than expected, or worse still, doesn't sell at all!
The good news however, is we've a vast amount of experience advising clients through disposals and exactly how to sell a business. We've identified several key factors that drive up the value, these are things you should develop and improve several years before any sale process commences.
Here are 12 of the biggest areas buyers look at when deciding what your business is really worth. Some quick links to sections covered in this blog post about:
Before we look at the key 12 areas, it's useful to know and learn why things can go wrong. Over the years we've found that many business owners presume that if their enterprise is profitable then it will automatically attract buyers. Unfortunately that's not entirely true and not always the case.
There's many reasons why deals can stall and some of these include:
The good news is many of these issues can be taken care of years before a sale is due to take place.
If your business can't function without you, buyer's won't see an asset, instead they'll likely see a very clear risk!
A prime objective should be to build a business that can work without you being there! It may sound and feel counter intuitive but this is a key driver to a sale! If you're integral to the success of the business on a day-to-day operational basis then a potential buyer will see that as too risky to purchase.
Owner-managers need to design themselves out of the business as much as possible early on. Create a management team that can run itself without you there, that's an attractive proposition! Go on holiday and see how everyone deals with things in your absence. Will your business be as healthy as when you left it?
Don't be the business superhero, it likely won't sell! Instead a sign of your success is how many talented people you can recruit and retain.
The best time to think about selling your business is often years before you actually do it.
Your business structure can have a significant impact on how much of the eventual sale proceeds you get to keep, after tax. If you sell your shares in the business to someone else, you may be able to apply for Business Asset Disposal Relief (BADR). Should you qualify this means that the gain you make could be taxed at an effective rate of 18%.
If however, it's the business selling something, then you need to be aware that the sale proceeds are taxed first within the business via corporation tax (applied at 19% - 25% depending on your level of profits). If you then take the money out via dividends, the top rates of dividend tax are likely to apply at 35.75% for higher-rate tax payers, and 39.25% for additional-rate tax payers.
The profits are in-effect taxed twice before they hit your pocket. Make sure you identify early on what you're likely to be selling, then organise everything to have the best chance of applying BADR.
Buyers likely want confidence that future growth isn't based on guesswork!
A business plan demonstrates direction, discipline, and whether management is delivering against expectations.
Your business plan is a yardstick to measure the progress of your overall strategy. It ensures you can monitor how well you're doing compared to your initial projections while providing a potential purchaser, or investor, with an understanding of the opportunity at hand.
Revisit it regularly. Compare the financial forecasts through business budgeting to your actual results on a regular basis (within your management accounts, for example). This will allow you to identify issues quickly and respond to them in a timely manner.
If your aim is to sell the business then you should factor that into the plan. Begin with the end in mind, and that means investment decisions today can be conducted with an eye on the future exit goal. The plan can help you focus on what matters and improve the long term appeal of the business to any would-be buyers.
Buyers don't just buy profits. They buy confidence in the numbers behind them.
Of course, strong turnover and profit margins matter, but so do the systems, structures, and reporting that support those figures and relationships.
If they don't trust the numbers, or there are gaps in them, then that represents risk! This could reduce the price you may be able to achieve in an exit event. To have dependable numbers means you have to have an effective back office finance function in place.
The more your competitive advantage (if you have it) can be protected, the more valuable your business is likely to become.
A buyer wants reassurance that key assets of yours can't be easily copied, challenged, or even lost!
Be sure to protect all intangible assets that are unique to your business. Think brand, trademarks, copyright, patents, website addresses and research and development. Consider getting this looked at from the very beginning by a specialist intellectual property lawyer.
Avoid the common mistake where a particular intangible asset (say a patent or website) is registered with the owner directly rather than the business. A potential buyer will expect the business to own all assets prior to any purchase.
If you do need to transfer assets from personal ownership to that of the business, don't plan to transfer all of these assets over to the business just before a sale takes place. In the future those intangible assets may be worth a lot more than they are now, so you could end up with a significant tax bill!
Get all of this sorted upfront and in the early stages of your business’ lifecycle. For innovative businesses, there are various tax breaks that can be applied for at HMRC - it is therefore worth exploring if you qualify for any of these which could reduce your corporation tax liability.
A buyer isn't paying for what your business achieved yesterday. Their interest is in what it could achieve tomorrow.
Future growth opportunities are often a major factor in determining a valuation. Ask yourself:
Businesses that depend too heavily on small handful of customers, suppliers, or employees will probably make buyers nervous.
Such concentration risk can significantly reduce value, and that's regardless of profitability.
Let's look at the Swiss, they're described as very shrewd, they haven't been involved in many wars and as a country they're very wealthy. They've acquired these riches by trying to maintain a neutral stance and limiting their alliances with other countries, organisations or political affiliations. They value their independence.
The same can apply with a business. Don't develop your enterprise in a manner whereby it becomes over reliant on 1 or 2 customers. Lose one of them and a huge chunk of the value of your business is gone!
Build systems to run the business and people to operate the systems. Your job as the owner is to then to look after your key people.
What stays in a business can sometimes be just as important as what comes out of it.
Many owners focus solely on the sale price whilst overlooking the impact of working capital requirements. Typically, a purchaser may consider paying in two separate amounts of money when they buy a business:
1. What they pay you in respect of the business itself
2. What they need to put in for sufficient working capital so that the business continues trading
If the business requires a significant amount of working capital to be injected at the point of sale for it to operate effectively, the buyer will have to write a second cheque for a substantial sum to fund this.
The second cheque can therefore negatively impact on the first cheque they write. Thus a business that is sold with sufficient working capital prior to sale is likely more preferable when thinking about the eventual sale value.
Make sure your systems operate in a manner whereby you get paid for your products/services before you have to pay your suppliers. Known as positive cashflow, this is a vital health sign.
This may come as a surprise but not all revenue is valued equally!
Buyers place a higher value on predictable, repeatable income than one-off sales.
Buyers prefer recurring revenue because it's less likely to be dependent on you and your people. Build a business around recurring revenue models with the aim of achieving a higher valuation. Consider the following different types of recurring revenue as you build your business:
| Long term contracts | Think commercial property contracts. |
| Auto-renewal | Examples include mobile phone, gym, and insurance contracts. |
| Sunk money subscriptions | Buying equipment and hardware which means you can only use that suppliers services, purchasing an Apple laptop only operates on iOS and iTunes. |
| Subscriptions | Such as magazines, wine clubs, software. |
| Sunk money consumables | Consider Nespresso coffee machines where you then have to buy the Nespresso coffee capsules. |
| Consumables | Toothpaste and cereals, basically things that can be sold over and over again. |
The less your clients or customers compare you on price, the more valuable your business is likely to become. Strong brands often create loyalty, differentiation, and greater pricing power over time.
Take Harley Davidson, they've built a whole environment around their brand. You purchase one of their motorcycles and you become part of a club. You wear the brand apparel, go to their events, and end up doing the marketing for them inadvertently.
Being emotionally attached to their brand, it ends up not being about the product but instead the lifestyle and community. This is known as critical non-essentials.
Buyers aren't just purchasing your business, they're purchasing your customer relationships.
The stronger and more loyal your customer base (see brand strength section above), the lower the perceived risk to the purchaser.
Identify your top 10 customers. Try to understand the traits that make you want to do business with them. Then stick to doing business with those that are a close fit to those attributes. This will help build your brand and to develop a more profitable business with customers who are happy to sign up to your payment terms.
Buyers want to know how content your customers are, so choose them carefully. A buyer is purchasing your customer base. If they're really satisfied then the likelihood of revenue continuing will be very high. Unhappy customers mean it will be an expensive business to maintain requiring a lot of investment in marketing and customer care to prevent them from leaving.
How satisfied are your customers? Do you know? If not consider conducting surveys to gauge things like your net promoter score and demonstrate this to a potential buyer.
Obviously we would say this but the right advisors can help increase value long before a buyer enters the picture.
Good advice influences everything from tax planning and systems design, to growth strategy and exit preparation!
Make sure you work with good advisors all along the journey. The right guidance from a combination of business coaches, accountants, lawyers and other professionals working as a team can add value in the following areas:
They ensure good housekeeping which makes the business more attractive to third parties. They'll counsel you so that you don't make decisions such as engaging in spurious tax avoidance schemes to save money which can jeopardise attracting a buyer.
Your advisors should also have extensive networks so that they can recommend other specialists as and when you need them.
Many business owners assume a sale is agreed when the price is agreed. In reality, that's actually the time when the toughest scrutiny often begins!
The due diligence process is where buyers test whether the business is as healthy, organised, and valuable as they've been lead to believe.
At some point with a buyer you will enter into a discussion about how to take things forward. At this stage you will create a headline document called, 'Heads of Terms' or a, 'Term Sheet'. This states such as:
Keep the terms as simple as possible, 2-3 pages at most can help you save time and make the process efficient.
You will then move onto the more formal due diligence process - this is a critical appraisal of the wellbeing of your business, specifically:
It's split into:
Entering into heads of terms doesn't necessarily result in a sale. So, have everything organised and in the right place, so that all relevant information is to hand and easily accessible by the purchaser and their advisors. Think about your:
Making everything clear and easily accessible to the buyer will add value to the process as it will reflect a robust business underneath it all. Finally, don't change advisors at the last minute as they probably won't be able to answer any of the important questions, so keep a settled team.
The content of this post was created on 31/07/2018 and updated on 24/06/2026.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.