Your Business Is Profitable, But Is It Sellable?
A profitable company isn’t automatically a sellable company. Learn what buyers examine beyond revenue and earnings, and how to begin strengthening your business before you’re ready to sell.
Your business is profitable. It supports your family, employs good people, and has built a strong reputation in the market.
But would it continue to perform if you were no longer there?
That’s the question many owners don’t confront until they receive an unsolicited offer, begin planning for retirement, or decide it’s finally time to sell. Unfortunately, the answer can have a significant effect on the price, terms, and overall marketability of the business.
I recently joined the CVC Home Service Success Network for a conversation about the difference between building a profitable company and building one that someone else can successfully own.
The discussion focused on home-service businesses, but the underlying principles apply to nearly every closely held company.
Buyers Look Beyond Current Profits
Buyers want profitable businesses. But they aren’t simply buying last year’s income statement.
They’re buying the expectation that the company will continue producing cash flow after the owner leaves.
That means a buyer must determine how much of the company’s performance comes from the business itself and how much depends on the owner’s personal effort, relationships, knowledge, and reputation.
Two companies can produce the same earnings and receive very different reactions from buyers.
One may have an experienced management team, documented processes, diversified customers, and reliable financial reporting. The other may depend on its owner to make every estimate, resolve every customer problem, supervise employees, and approve every important decision.
The earnings may look similar on paper, but the risks are different.
Buyers generally have more confidence in a company when they believe its earnings are predictable, transferable, and sustainable.
How Dependent Is the Business on You?
Owner dependence is one of the most common issues in privately held businesses, particularly in the home-service trades.
The owner may:
Prepare or approve every significant estimate.
Maintain the most important customer relationships.
Hold a license or technical qualification essential to the operation.
Supervise the field team.
Control purchasing and vendor relationships.
Handle difficult service calls.
Keep important operating knowledge in their head.
Make nearly every meaningful decision.
This arrangement may work while the owner is actively involved. In fact, it may have helped the company become successful.
But a buyer must ask what happens when that owner is no longer there.
If customers are loyal primarily to you, will they remain after the sale? If employees rely on you to solve every problem, who will lead them? If you perform the estimating, sales, and quality control functions, how many people will a buyer need to replace you?
The more of the owner’s responsibilities a buyer must take on or assign to others, the greater the potential risk and expense.
Revenue Alone Doesn’t Determine Value
Owners understandably take pride in revenue growth. Buyers will certainly examine sales, but revenue doesn’t tell the whole story.
A buyer will also want to understand:
How much profit the company generates.
Whether the reported earnings can be verified.
Which services produce the best margins.
Whether revenue is recurring or must be recreated each year.
Whether a few customers represent a disproportionate share of sales.
Whether recent performance is improving or declining.
Whether the company has enough working capital to operate normally.
What investments will be needed after closing.
Whether the current team can support the business without the seller.
A company with $10 million in revenue and thin, inconsistent margins may be less attractive than a smaller company with stronger margins, dependable customers, and a management team capable of running the operation.
Buyers want to understand what the business can earn under new ownership.
Reliable Financial Information Builds Buyer Confidence
Many successful private businesses manage their financial statements primarily for tax purposes.
Owners may also run personal or discretionary expenses through the company.
Those practices aren’t unusual, but they can make it difficult for a buyer to determine the company’s true earnings.
Before going to market, the owner and the advisory team should develop a clear, supportable presentation of the company’s financial performance. Any adjustments to reported earnings should be documented and defensible.
A buyer may accept a legitimate adjustment for a nonrecurring or owner-specific expense. It’s much less likely to accept an adjustment that can’t be traced to the financial records or adequately explained.
Poor records do more than create accounting questions. They can cause the buyer to wonder what else may be difficult to verify.
Clean financial reporting helps establish value and builds confidence in the business and the seller.
Customer Concentration Can Change the Risk Profile
A company may have excellent earnings while depending heavily on one or two customers.
That concentration may not feel risky to the owner. The relationships may have lasted for years, and the customers may seem completely loyal.
A buyer sees a different situation.
If one customer represents a significant portion of revenue, the loss of that relationship could materially affect the company’s ability to repay acquisition debt and generate a return on the buyer’s investment.
The buyer will want to know:
Why the customer continues to choose the company.
Who owns the relationship.
Whether contracts or recurring arrangements are in place.
Whether the customer is likely to remain after the owner departs.
How quickly the lost revenue could be replaced.
A long customer history is helpful, but diversification usually creates a stronger and more resilient business.
Employees and Systems Make Earnings Transferable
A company becomes more sellable when its success is supported by people and processes that remain after closing.
An owner doesn’t need to withdraw completely from the business before selling, but other employees should know how to perform its essential functions.
Consider whether your company has:
Clearly defined employee responsibilities.
A capable second level of leadership.
Documented estimating, sales and operating procedures.
Consistent customer-service standards.
Reliable scheduling, billing and collection processes.
Employee compensation that reflects market conditions.
Training and quality-control systems.
A realistic plan for replacing the owner’s responsibilities.
Documentation alone won’t solve owner dependence. A procedure manual has limited value if no one besides the owner has the authority or experience to use it.
The goal is to create a business in which employees have the information, ability, and accountability to perform without constant owner intervention.
An Unsolicited Offer Doesn’t Establish Market Value
Owners of successful businesses are increasingly contacted by individual buyers, competitors, private-equity-backed companies, and other investors.
An unsolicited approach can be flattering. It may also create the impression that the buyer has already recognized the full value of the company.
An offer from one buyer tells you what that buyer is willing to propose. It doesn’t necessarily reflect what the broader market would pay.
The buyer may have a strategic reason for contacting you. The buyer may also be hoping to complete a transaction without competition.
Before agreeing to exclusivity or signing a letter of intent, understand:
The realistic market value of the business.
The buyer’s financial ability to complete the transaction.
How the buyer intends to finance the acquisition.
The amount paid at closing.
Any seller financing or earnout.
Working-capital expectations.
Your required transition period.
The conditions that could allow the buyer to renegotiate or withdraw.
You should also consider whether approaching additional qualified buyers could produce a better comparison of price, structure, and fit.
The Highest Offer May Not Produce the Best Outcome
Sellers naturally focus on the purchase price. But the largest number at the top of an offer isn’t always the best deal.
Consider two hypothetical offers for the same business.
One buyer offers $5 million, with $4.5 million paid at closing.
Another offers $5.5 million, but includes a substantial seller note, an earnout tied to future performance, and a longer employment commitment for the seller.
The second offer has the higher headline price. It may or may not provide the better outcome.
The seller and the advisory team must evaluate:
Cash paid at closing.
Contingent payments.
Seller-note repayment risk.
Earnout measurement and buyer control.
Working-capital adjustments.
Taxes.
Indemnification obligations.
Transition requirements.
Financing certainty.
The buyer’s ability and willingness to close.
Along with the price, consider when you’ll be paid and the risks and conditions attached to those payments.
Your real payday is determined by what you ultimately receive and what you must do or risk to receive it.
Start Building a More Sellable Business Now
You don’t need to be ready to sell before improving the company’s sellability.
Begin by asking four questions:
1. What would stop working if I disappeared for 30 days?
The answer will identify areas of owner dependence and operational risk.
2. Can an outside party understand and verify our earnings?
Review the quality and consistency of your financial information. Identify adjustments that would need to be explained to a buyer.
3. Which relationships and responsibilities need to be transferred?
Start involving other employees in important customer, vendor, and operating relationships.
4. What would make a buyer nervous?
Look at the business from the buyer’s perspective. Customer concentration, employee turnover, undocumented processes, declining margins, unresolved legal issues, and excessive owner dependence can all affect confidence.
A sellability assessment can help identify these issues before a buyer discovers them during due diligence.
Some weaknesses can be corrected relatively quickly. Others require several years of deliberate work to fix. The earlier you identify them, the more options you’re likely to have.
Build a Business Worth Keeping or Selling
A more sellable company is usually also a better company to own.
It can give you more freedom, reduce operational risk, improve accountability, and make the business less dependent on your daily involvement.
And when the time comes to sell, buyers can see a company capable of continuing under new ownership.
If you want to understand what your business might sell for today and what could make it more valuable and easier to sell in the future, schedule a confidential discovery conversation with HartmannRhodes.
You only sell your business once. Make it count.
If you want to understand what your business might sell for today and what could make it more valuable and easier to sell in the future, schedule a confidential discovery conversation.
Common Questions About Business Sellability:Is a profitable business always sellable? No. Profitability is important, but buyers also consider whether the earnings are verifiable, sustainable, and transferable to a new owner. Excessive owner dependence, customer concentration, weak records, or the absence of capable employees can make a profitable company more difficult to sell. How does owner dependence affect business value? A buyer may need to hire multiple people or accept additional operating risk to replace an owner who performs several essential roles. That can reduce the price a buyer is willing to pay, affect the deal structure, or limit the number of interested buyers. Do I need to leave the business before I sell it? No. Many buyers expect an owner to assist with the transition. However, the business should have a credible plan for transferring the owner’s responsibilities within a defined period. Does more revenue always mean a higher business value? No. Revenue must be evaluated alongside margins, earnings quality, customer concentration, growth, required investment, and business risk. Buyers typically focus more heavily on sustainable cash flow than revenue alone. Should I respond to an unsolicited buyer? You can respond without committing to a transaction. Before providing confidential information or signing an LOI, understand the buyer, require an appropriate nondisclosure agreement, and evaluate whether the proposed process is likely to produce the best outcome. When should I begin preparing my business for sale? Ideally, several years before you expect to sell. Longer preparation gives you more time to reduce owner dependence, strengthen the management team, improve financial reporting, and address customer or employee concentration. |
Mark Hartmann is a former business owner turned M&A advisor—and the author of Sweat Equity Payday—who knows firsthand what it takes to build, grow, and sell a successful company. A three-time Inc. 5000 CEO honoree, he led his own eight-figure sale and now helps business owners sell companies worth $1M to $25M. Mark understands that selling a business is personal, not just financial. That’s why he works closely with owners to maximize value, protect their legacy, and transition on their terms.
He holds an MBA from Eastern University and a master's degree in organizational change management from St. Elizabeth University, as well as Certified M&A Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB) credentials.
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HartmannRhodes advises owners of companies typically valued between $1–$25 million. If you’d like a structured pre-sale valuation review and a readiness roadmap, we can walk you through the process and tailor it to your timeline and goals. Contact us today!
Blog: Your Business Is Profitable, But Is It Sellable?