Dear BTF Community,
A strong business can still give a buyer plenty of reasons to lower the price.
Customer concentration, owner dependency, messy financials or years of underinvestment can all change how a buyer views value, even when the company is growing.
At Business Transitions Forum Toronto, Elaine Barsalou, Michele Cooper, Ronen Kroparo and Mackenzie Regent joined moderator Barbara Mech to examine what makes a business more valuable and easier to transfer.
Their discussion came back to a simple connection: many of the decisions that reduce risk for a future buyer also build a stronger business for the owner today.
Key Takeaways for Business Owners:
- Valuation reflects how much risk a buyer believes they are taking on.
- Owner independence, quality growth and clean financials make value easier to defend.
- Preparing for a future transaction shouldn’t come at the expense of investing in the business today.
Enjoy,
Mark
Valuation Is A Reflection Of Risk
A seller enters a transaction knowing almost everything about their company. A buyer knows considerably less but is being asked to invest based on its future performance.
Mackenzie described that gap as information asymmetry.
“At the end of the day, valuation is a reflection of risk, and not necessarily actual risk, but perceived risk.”
When buyers can’t get comfortable with that risk, it can affect price, how much is paid upfront or how the deal is structured.
Barbara added an important consideration:
“Some of it will depend on the buyer too. That is not a homogeneous universe.”
Different buyers bring different priorities and tolerances for risk. What concerns one may be manageable to another, which is one reason valuation can’t be reduced to a single multiple or formula.
Can Your Business Pass The Vacation Test?
One of the clearest risks in an owner-led company is dependence on the owner.
Mackenzie described what she calls the “vacation test.”
“If you as an entrepreneur can’t go on vacation without working the entire time, a buyer is going to be hesitant. They’ll worry the business is going to walk out when you walk out.”
As a company grows, knowledge, relationships and decision-making need to extend beyond the founder. That requires capable leaders, documented processes and systems that allow the business to operate independently.
Ronen cautioned owners against waiting until a sale is approaching to start that work.
“The reality is it’s never too soon. Most of these things take a long time to implement, but more importantly, they’re just good business practices.”
A company that can operate without constant owner involvement is easier to grow and ultimately easier to transfer.
Know How Others Will Value Your Business
Owners can spend decades building a company without knowing how a lender, investor or buyer would assess it.
Michele’s advice is straightforward:
“Educate yourself on your own company because what that does is it opens up options.”
That means understanding what the business may be worth today, how the industry is valued and what could improve that position over the next several years.
Starting those conversations early gives owners time to address weaknesses properly and make deliberate decisions about where to invest.
Don’t Take Your Foot Off The Gas
Once an exit starts to feel closer, owners can become reluctant to make investments they may not personally be around to benefit from.
Elaine cautioned that buyers notice.
“The numbers are very important, but to crystallize value, it’s all about the future. People are paying for the future trajectory and trend of the business.”
Delaying a technology project, capacity expansion or another long-term investment may preserve cash today but leave a buyer questioning what the company will require after closing.
Elaine’s advice is to keep running the company with the ambition that built it.
“I always say to people, act as if you were 25 years earlier in your career and eager to grow the business to the next level.”
A future transaction shouldn’t become a reason to stop investing in the company’s future.
Growth Has to Be Defensible
Growth attracts buyers, but Ronen drew a distinction between rapid growth and quality growth.
Revenue can rise while customer concentration increases, operations become stretched or margins become harder to sustain. Buyers need to understand where growth came from and whether it can continue.
The same applies to financial reporting. Ronen’s shorthand was simple:
“Clean is easy.”
Barbara agreed, “as an investor and lender that clean is easy.”
Clear financials make performance easier to assess. Complicated adjustments and excessive add-backs create more questions during diligence and make the owner’s story harder to defend.
Perfect Isn’t Credible
Owners naturally want to present their company at its best during a transaction. Trying to present it without weaknesses can have the opposite effect.
Mackenzie put it plainly:
“There’s hair on every business. Buyers understand that.”
Buyers expect to uncover challenges. Finding something that should have been disclosed can create a bigger concern than the issue itself because it raises questions about what else they don’t know.
Elaine made a similar point about negotiation. Some buyer concerns will be legitimate. Understanding which ones matter and how they can be addressed is more productive than fighting every point.
Transparency helps reduce the uncertainty a buyer has to price into the deal.
Final Reflection
Capable leadership, diversified customers, disciplined growth and reliable information make a company stronger for its current owner and easier for a future buyer to understand.
Building those qualities takes time, which is why readiness matters long before a sale is planned.
As Elaine noted, the opportunity itself may arrive unexpectedly:
“If you are always in a mindset of the phone can ring any day, the more you’ve thought about it, the more you can react adequately to what’s on the table.”
The stronger the business before that call comes, the more choice the owner has over what happens next.