For most business owners, 75% of their net worth is tied up in their company. What started as an idea—a way to solve an unmet market need—evolved into a business requiring constant reinvestment in people, marketing, equipment, and technology to fuel growth and remain competitive.
Then 2 years pass, then 5, then 15… The business grows, the owner continues innovating and reinvesting. But wasn’t it supposed to get easier, less risky, and more predictable?
Sure, there have been perks along the way—the company car, a few “business trips,” the ability to take distributions when profits allowed. But after years of hard work, sleepless nights, and weathering economic cycles, when does all that investment turn into a liquidity event that provides real financial freedom?
Does simply growing revenue ensure a valuable exit?
Let’s compare two companies and challenge some common assumptions:
Company A | Company B | |
Annual Revenue | $20M | $35M |
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) | $2M | $3.5M |
3-Year Revenue Growth | Flat | 5% CAGR |
At first glance, Company B looks like the better investment—higher revenue, higher EBITDA, and growth. But let’s dig deeper into the factors that truly drive valuation.
Beyond the Numbers – What Really Creates Value?
A potential buyer doesn’t just look at revenue and profit—they evaluate risk and sustainability. Here are nine key factors that impact a company’s exit value:
Owner Dependency: How many hours per week does the owner work? Is the business reliant on them for sales or operations?
Management Strength: Does the company have a tenured, capable leadership team?
Customer Diversification: Does any single customer make up more than 15% of revenue?
Supplier & Partner Stability: Are key vendors and supply chain relationships diversified?
Product & Service Breadth: How is the business integrated or adding value to increase market share?
Customer Stickiness: What are the “switching costs” if a customer considers leaving?
Financial Health: Are gross margins, cash flow, and earnings stable over the past 3 years? How much debt is the company carrying?
Scalability: Can the company grow without major reinvestment or owner involvement?
Intellectual Property: Does the company have patents, trademarks, or proprietary assets protected?
Now, let’s look at how Company A and B perform in these areas:
Company A | Company B | |
Owner Involvement | 15 hours/week, not critical to sales or operations | 60+ hours/week, responsible for 50% of sales |
Leadership Team | Stable for 6+ years, incentive-driven with non-competes | New CFO & COO, still hiring key roles |
Customer Concentration | No single client >4% of revenue | One client accounts for 32% of revenue |
Contracts & Recurring Revenue | 40% of revenue under assignable contracts | Only 5% of revenue under contract |
Intellectual Property | 3 pending patents, registered trademarks | No protected IP, brand assets unprotected |
How Does This Impact Valuation?
While Company B looks bigger, it carries higher risk—heavily dependent on the owner, client concentration, weaker leadership stability, and lack of protected assets.
🔹 Company A is more attractive to a buyer and trades at a premium valuation:
📌 6X EBITDA = $12M sale price with 60% cash upfront ($7.2M), a short earnout, and a smooth transition.
🔹 Company B struggles to find a buyer willing to take on its risks and settles for:
📌 3X EBITDA = $10.5M sale price, but with only 20% cash upfront ($2.6M) and a long, restrictive earnout.
The lesson? Growth alone doesn’t determine value—how you build and structure your business does.
Are You Building a Business Buyers Want?
Most owners are experts in their field but don’t always step back to see how a buyer evaluates their company. If 80% of your wealth is tied up in your business, making intentional moves today can increase your value, reduce your risk, and create a smoother exit when the time comes.
If this resonates with you, let’s talk. A short, confidential conversation could help you identify the right next steps to increase your exit options and future financial freedom.
Shel Hart
Comments