The value of a business: why financial performance alone is not enough

For many entrepreneurs, the value of a business is directly linked to financial figures – especially revenue, EBITDA, and market multiples. These are, of course, important and provide an overview of the company’s past financial performance. However, to understand the true value of a business, we need to look at it from the perspective of buyers, beyond these traditional indicators.

For a buyer, evaluating a business is not just about what has been achieved so far, but also about future potential. What risks are involved in acquiring this business? What factors make it a solid investment? What makes it attractive compared to other investment options in the market? These are the questions a buyer asks when analyzing an acquisition opportunity.

In this equation, the factors contributing to a business’s value are essential. The 8 key factors outlined below, if understood and implemented correctly, can make the difference between an average business and an extremely valuable one.

 1. Financial performance is essential but not enough

Of course, strong financial performance – good profit margins, stable revenue, and healthy cash flow – is important. However, a buyer will not be impressed by past numbers alone. What they really want is a business that offers clear growth prospects. For example, a company that can demonstrate a recurring revenue model is much more attractive than one that relies solely on occasional projects.

Financial performance is not just about how much you earn now, but also how easily the company will be able to generate revenue in the future. That’s why it’s important to have clear and transparent accounting and be able to show that there is an efficient system for managing costs and cash flow.

 2. EBITDA and multiples are just part of the story

Many focus on EBITDA and market multiples to evaluate a business’s value. However, these indicators are not enough to fully understand the potential of a company. EBITDA may reflect profitability, but it doesn’t account for the risks or the long-term structure of the business.

The revenue or EBITDA multiple can vary greatly depending on the industry and economic context, and a buyer will look at many more factors than just these numbers. For example, if a business relies on a single client or an exclusive supplier, this may present significant risks, and buyers will assess these risks when determining its value.

 3. The key factor of the “Switzerland Structure”

Buyers are interested in stability, and a business that depends on a single client, a single supplier, or a key employee can be a major risk. This is where the concept of the “Switzerland Structure” comes in. It refers to the idea that a business should operate efficiently and generate steady revenue without relying too heavily on a single entity.

Imagine a business with a balanced structure – like Switzerland, which doesn’t rely on one partner or resource. Diversifying the client base, suppliers, and employees is a key element in increasing the value of a business. If your company can function well even without the direct involvement of a single supplier or employee, it becomes much more valuable.

 4. Growth Potential

Buyers don’t just acquire stable businesses, they also acquire businesses that offer long-term growth potential. They will want to see that there are opportunities to expand into new markets, new sectors, or through new products. For example, a company that can demonstrate easy expansion into a different geographic region or new market verticals will be much more attractive than one that has already reached its growth limit.

If your business has a clear, realistic scalability plan that can be implemented quickly, you’ll definitely attract more buyers and, consequently, a higher offer.

 5. Market control and niche monopoly

Buyers love monopolies, not just because they are profitable, but because they offer market control. If your business has a significant competitive advantage or even a monopoly in a niche, you’ll be able to set prices and achieve higher margins, which will lead to a higher valuation.

Specializing in a niche may seem like a risky strategy at first, but in the long term, a company that dominates a small but profitable market segment is far more valuable than one that competes in a crowded market.

 6. Recurring revenue and financial stability

Recurring revenue is one of the most powerful elements that can increase a business’s value. If you can show that your business generates stable income through long-term contracts or subscriptions, you’ll reduce uncertainty for a potential buyer. This means fewer risks and more financial stability, which enhances the attractiveness of your business in the long run.

 7. Customer satisfaction

Customer satisfaction is one of the strongest indicators of a business’s success. Buyers don’t just want a profitable business; they want a business that has a loyal customer base and a high chance of attracting new customers because of its reputation. Net Promoter Score (NPS) and positive testimonials are key elements that prove your business can maintain and grow long-term relationships with clients.

 8. Independence from the owner: the “Hub & Spoke” model

Another important factor in evaluating a business is the extent to which it can operate independently from the owner. Many buyers avoid businesses that rely too much on the direct involvement of the owner. If your business is a “Hub & Spoke” model – meaning all decisions go through you – it will be much harder for a buyer to imagine how they could take over the business without a long adjustment period. It’s important to develop processes and invest in building a reliable management team to ensure business continuity without constant involvement from you.

Conclusion

In conclusion, the value of a business cannot be reduced to its past financial performance or traditional indicators such as EBITDA and market multiples. A buyer will assess the business from a much broader perspective, focusing on factors that demonstrate stability, scalability, and growth potential. Creating a business that can operate efficiently without depending on a single client, supplier, or employee, with recurring revenue and high customer satisfaction, will attract buyers and significantly increase your business’s value.

Therefore, when building your business, think about its future potential. A solid foundation, on which any buyer would want to build, is obviously attractive. By doing so, you’ll transform your business into a valuable asset capable of attracting interesting offers in the long run.