The importance of revenue growth when selling a business
At the most basic level, there are three primary factors that impact business value: 1, the quality, level and stability of earnings; 2, risk factors; and 3, likely future earnings growth. A business will be more marketable and valuable if over the past 3-6 years there has been solid growth in both revenue and earnings, and if during the business sale process the revenue and earnings continue to grow. Some business owners mistakenly believe that if they have posted growing numbers up until they are ready to sell, they can allow the numbers to decline a little and it won’t impact the marketability or sale of their business. Unfortunately, that’s not true.
Declines in performance increase a buyer’s perception of risk. Many buyers will wonder if the business may have peaked and the downward trend will continue after they buy the business, which will cause them to be less likely to buy the business, or if they do acquire it, they may offer a lower price than if performance was trending upward. Likewise, buyers tend to view revenue and earnings that rise and fall from year to year as being unreliable, unpredictable, and therefore more risky. Many business sellers, particularly if nearing retirement, put less effort into their businesses the last few years before they sell, but to have the best odds of a positive business sale outcome business owners should be doing everything they can to demonstrate solid levels of year-over-year business growth.