1. Sales Growth Has to Be Profitable and Sustainable
Acquirers like growth. But not all growth creates value.
Revenue can increase while margins deteriorate, working capital requirements rise or the business becomes more dependent on a small number of customers.
The better question is therefore not simply:
Are sales growing?
It is:
What is driving the growth, how profitable is it and how likely is it to continue?
A prospective acquirer may look at the diversity of the customer base, recurring revenue, customer retention, pricing power, market demand and the opportunity to introduce new products, services or geographic markets.
This is where the quality of growth becomes important. A business with diversified customers, strong loyalty and a meaningful proportion of recurring or repeatable revenue will generally present a different risk profile from one that depends heavily on a handful of customers or continually needs to replace transactional work.
Business improvement planning can then turn those observations into practical action — improving the customer mix, strengthening pricing, focusing resources on profitable products and services, building recurring revenue and reducing reliance on individual customers.
That is the difference between growth for growth's sake and growth that genuinely contributes to enterprise value.
2. Profitability Is About the Quality of Earnings
EBITDA is an important measure in many M&A transactions because it provides a starting point for assessing the earnings capacity of the operating business.
But an acquirer will rarely stop at the reported EBITDA figure.
They will want to understand how those earnings were produced.
Are margins improving or declining? Are wages and operating costs under control? Is the reported profit dependent on unusually low owner remuneration? Are there legitimate one-off adjustments? How does profitability compare with similar businesses?
Benchmarking becomes especially useful here because it gives an owner something more meaningful than a standalone profit figure.
The key measures may include:
- Gross profit margin.
- Salaries, wages and on-costs as a percentage of sales.
- EBIT as a percentage of sales.
- Net profit before tax.
- Return on capital employed.
- Operating cost efficiency.
The important comparison is not only with the industry average, but also with the top performers in the sector.
That creates a more useful question for an owner:
How does our financial performance compare with the businesses an acquirer is most likely to regard as high quality?
A business consistently outperforming its peers on profitability is generally telling a stronger story than one producing the same revenue but significantly lower margins.
3. Profit Is Important — Cash Flow Makes It Real
One of the biggest differences between a business that looks good on paper and one that attracts a sophisticated acquirer is often cash flow.
A company can report healthy profits and still absorb significant amounts of cash through debtors, work in progress, inventory or inefficient working capital.
That matters because a buyer is not purchasing accounting profit in isolation. They are purchasing a business that needs to fund itself after settlement.
The areas an acquirer may examine include:
- Debtor and work-in-progress days.
- Stock turnover.
- Cash cycle days.
- Working capital requirements.
- Marginal cash flow.
- Interest cover.
- Current and quick ratios.
- Debt relative to earnings.
A business that produces strong EBITDA but continually requires additional capital to support its operations is different from one that converts earnings efficiently into cash.
This is why cash flow management forms such an important part of a Business Improvement Plan.
The focus may include cash flow forecasting, managing debtors and work in progress, reviewing payment terms, monitoring liquidity ratios and establishing clearer responsibility for cash management.
Strong cash conversion gives an acquirer greater confidence that the earnings being presented are translating into real economic value.
4. Risk Influences How Much Confidence a Buyer Places in the Earnings
This is where business value becomes much more interesting.
A business may have excellent earnings today, but if there is significant uncertainty around whether those earnings can continue, an acquirer will factor that risk into the transaction.
Risk can take many forms:
- Customer concentration.
- Reliance on the owner.
- Key employee dependence.
- Weak management capability.
- Inadequate financial reporting.
- Poor succession planning.
- Technology disruption.
- Supplier concentration.
- Cyber and compliance exposure.
- Inadequate cash reserves.
- An operating model that is difficult to transfer.
The financial performance tells an acquirer what the business has achieved.
Risk tells them how confident they should be that it can continue.
This is why our Risk and Value Driver Assessment looks beyond financial results alone. It considers the areas of the business that can strengthen or weaken the sustainability and transferability of those earnings.
The Human Value Drivers Are Often the Difference
Some of the most important drivers of enterprise value do not appear neatly on the profit and loss statement.
They sit inside the organisation.
Does the business have capable managers?
Are good staff likely to stay?
Do employees understand the direction of the business?
Can knowledge and intellectual property be transferred?
Will customers remain when the owner leaves?
Is there someone capable of taking over key responsibilities?
These are what I consider human value drivers.
For an acquirer, they can be just as important as the financials.
If the value of a business walks out the door with the owner, the buyer has a problem.
If the capability sits within a strong management team, established customer relationships, transferable knowledge and a healthy culture, the business becomes much easier to transition.
The objective is not to remove entrepreneurial leadership. Often that entrepreneurial drive is exactly what created the business in the first place.
The objective is to make sure the organisation around the owner becomes strong enough to carry that value forward.
Enterprise Value Is Built Before the Valuation
Owners often approach a valuation expecting the answer to be a number.
A better question is:
Why is the business worth that amount?
That is where business improvement planning becomes powerful.
A Risk and Value Driver Assessment can help identify where a business is strong, where risk remains and where there may be opportunities to improve value over time.
The Business Improvement Plan then turns those findings into actions.
For one company, the issue may be profitability.
For another, it may be cash conversion.
Another may need stronger management, a more diversified customer base, a greater proportion of recurring revenue or a more credible succession plan.
And for many businesses, it will be a combination of several factors.
This changes the conversation from:
What is my business worth?
to:
What is preventing this business from being worth more?
Think Like the Acquirer
If you want to understand what makes a business valuable, look at it from the other side of the transaction.
An acquirer wants a business that can:
- Continue growing.
- Produce sustainable profits.
- Convert those profits into cash.
- Retain its customers and people.
- Operate without excessive dependence on the existing owner.
- Manage the risks that could threaten future earnings.
That is what creates confidence.
And confidence matters because enterprise value is not simply about what the business earned last year.
It is about how much confidence an acquirer has in what the business can produce in the years ahead — and how much risk they must accept to achieve it.
For business owners, that means the work of building value should begin well before a formal valuation or M&A process.
Measure the business. Benchmark it. Understand the risks. Strengthen the human value drivers. Build an improvement plan and track the results.
Because ultimately, the businesses that attract acquirers are not just profitable businesses.
They are businesses where sales growth, profitability, cash flow, risk management and human value drivers come together to create sustainable, transferable enterprise value.
What Comes Next?
Understanding what drives business value is useful, but the real benefit comes from deciding what to do with that information.
For some owners, the priority will be to improve the business first — strengthening sales growth, profitability and cash flow, reducing risk and building the management capability and human value drivers that support a stronger enterprise value.
That is where business advisory and consulting can play an important role. By benchmarking performance, identifying the areas that are holding value back and developing a practical improvement plan, owners can work deliberately towards a stronger business rather than waiting until a sale or succession event is approaching.
For other owners, the business may already be approaching the point where succession or a sale should be considered. A structured business sales process can help an owner understand value, prepare the business for buyer scrutiny, position the opportunity in the market and manage the transaction through negotiation and settlement.
For larger, more complex or strategically attractive businesses, the appropriate pathway may be mergers and acquisitions. An M&A process may involve strategic or financial acquirers, more detailed valuation and preparation, confidential buyer engagement, due diligence and a more structured approach to negotiating both value and transaction terms.
The right pathway will depend on the size and complexity of the business, the owner's objectives, the strength of the business today and the type of buyer most likely to recognise its value.
What matters is that these decisions are made with a clear understanding of the business today, the value improvement opportunities that still exist and the outcome the owners ultimately want to achieve.
Whether the next step is business advisory, preparing for a business sale or exploring a mergers and acquisitions transaction, the starting point is the same: understand what is driving the value of the business and what needs to happen next.