What buyers look for when they value an SME

Most owners have a figure in mind for what their business is worth. Far fewer know what a buyer will actually look at to decide whether that figure stands up.

I’ve seen this from both sides. I helped grow a software business through to a trade sale in 2022, then led it inside the buyer’s organisation after the acquisition. The lesson from both is the same: a buyer isn’t paying for what you’ve achieved. They’re paying for confidence that it will carry on once you’ve gone.

The question a buyer is really asking

When our business went through its sale, the buyer looked closely at where the owners were still needed. Could the business function without us, or were we essential to keeping everything moving?

They examined the processes, the systems and the contractual agreements supporting the business. It wasn’t just about the results. It was about how securely the business could continue under new ownership.

That’s the question underneath every part of a valuation:

If the owner steps back, what exactly is the buyer taking on, and how reliably will it perform?

What knocks value off

In the businesses I see, the same problems come up again and again:

• The owner holds all the customer relationships.
• There are no proper processes or systems, so how the work gets done lives in people’s heads.
• There’s no leadership team that could run the business day to day.
• The numbers don’t stand up to scrutiny.

Each one raises a doubt about what the buyer is actually getting. Doubt doesn’t always kill a deal, but it costs you: in the price, in how much is paid upfront, and in how long you’re tied in afterwards. Most of these come back to the same root cause, which I’ve written about in how to make your business less dependent on you.

Turnover isn’t value

I’ve seen a business with a very large turnover but very little profit, where the owners expected a valuation three to four times higher than the business could realistically support.

The turnover was impressive. The earnings didn’t justify the expectation. It’s a good example of why the size of a business and its value aren’t the same thing. A buyer needs to understand what income that turnover actually produces, and how sustainable it is.

If you’re proud of your top line, that’s fair enough. Just don’t assume a buyer will pay for it on its own.

Earn-outs, and what you’ll actually receive

In my experience, an earn-out is nearly always on the table. That’s where part of the price depends on the business hitting targets after the sale.

So the headline figure is only part of the story. Before you agree to anything, you need to understand three things:

• How much you’ll receive upfront.
• What you’ll have to deliver afterwards to receive the rest.
• How much control you’ll actually have over hitting those targets once someone else owns the business.

The last one is easy to overlook. A target can look achievable today and much harder once decisions are being made by the new owner.

An offer isn’t a sale

The most common mistake I see is owners thinking: “I’ll put the business on the market, get an offer and sell it.” They underestimate what comes between accepting an offer and completing the deal.

That gap is due diligence, where the buyer examines the detail and checks whether the business stands up to what they’ve been told. Contracts, numbers, systems, people: it all gets looked at. Until you get through it, the sale is still on paper.

An offer is a significant step. It isn’t a completed sale. The businesses that get through due diligence well are the ones that did the preparation long before anyone made an offer.

The part nobody puts in the valuation

After the acquisition, I saw the other side: the expectation that the acquired business would simply slot into the buyer’s organisation.

In practice, culture is key. You can bring together the systems and the reporting, but if the cultures don’t align, there’s friction. How people make decisions, communicate and lead their teams matters enormously. A deal can make complete sense commercially and still be difficult to make work day to day.

It’s worth thinking about early, because the people you’re handing over to will be living with it long after the paperwork is signed.

Where to start this year

If you think you might sell in three to five years, start now. Look at the business as a whole and ask one question:

How can I make this run without me?

Work through the team, the customer relationships, the decisions, the systems and the financial information. Wherever the business relies on you personally, start building the capability for someone else to take responsibility.

None of that is quick, which is why it needs to start this year rather than when you’re ready to sell. If you want an independent view of where the business stands today, that’s what the Business Value Review is for: a structured look at over 170 areas of the business, with a close eye on how much of it depends on you.

Why I’d put recurring income first

This is the view some advisers might disagree with. For me, recurring income is king. I’d put building dependable recurring revenue ahead of chasing turnover for its own sake.

A buyer will usually place a higher value on income they can reasonably expect to continue than on sales that have to be won again every month. It isn’t guaranteed revenue. But strong contracts, good retention and a reliable customer base give the buyer more confidence in future earnings, and that confidence can make a real difference to the multiple they’re prepared to pay.

Bigger isn’t the goal. A business that runs without you, earns properly and keeps its customers is the one a buyer will pay for, and it’s a better business to own in the meantime, whether or not you ever sell.