Key figures will shape the initial view on valuation, risk and whether the opportunity is worth pursuing.
Before approaching buyers, you should be able to explain the financial profile of the business through five key numbers.
These figures will shape the initial view on valuation, risk and whether the opportunity is worth pursuing. They’ll also build confidence by showing that you know the key financials of your business.
1. (Adjusted) EBITDA
EBITDA is usually the main valuation reference point for a profitable business. It should earnings generated, excluding non-operational costs. Ideally, you want to be able to present an adjusted EBITDA figure to buyers: removing one-off expenses, owner-specific items etc. as this will give a stronger idea of the earnings under normal operating conditions.
Buyers will usually apply a valuation multiple to adjusted EBITDA, so even relatively small changes can have a material impact on the headline valuation. However, aggressive adjustments can ultimately reduce confidence in the financial information and weaken the seller’s position during negotiations.
The figure should therefore be prepared before buyer discussions begin, with a clean bridge from reported to adjusted EBITDA where possible.
2. Revenue
Revenue gives buyers the first indication of the scale of the business. You should know the figure for the latest financial year, but also the last 12 months, especially if trading has moved materially since year-end.
If revenue includes pass-through costs, recharges or other amounts which generate little or no margin, you should also calculate net revenue. For example, a business reporting £10m of revenue including £4m of customer recharges is not economically comparable to one generating £10m entirely from its own services.
You should also know how much revenue is recurring or one-off. Buyers will of course place more value on revenue which is expected to continue. The classification needs to be supportable: for example, a client buying regularly is not necessarily recurring revenue if there is no contract or reliable pattern of repeat business.
3. Growth
Buyers will look at revenue growth to assess whether the business is expanding, stable or beginning to slow down. You should be able to explain:
- Previous financial year growth
- Latest financial year growth
- Last 12-month growth
The key point is what is driving the increase. Growth may come from new clients, higher prices, increased customer spend, acquisitions or the launch of new products. Buyers will of course place more weight on growth that is spread across the business than growth which depends on one large client or a single contract.
Revenue growth should also be considered alongside gross profit and EBITDA. If revenue increases by 20% but EBITDA remains flat, buyers will want to understand whether suppliers are charging more, investment has increased or if the new revenue is just less profitable.
4. Client concentration
Client concentration measures how dependent the company is on a small number of relationships. A business may be growing and profitable, but still present a material risk if the loss of one client would significantly reduce revenue or EBITDA, particularly if the founder leaves along with the relationship.
The most useful figures are normally:
- Largest client as a percentage of revenue
- Top five client as a percentage of revenue
- Top 10 client as a percentage of revenue
The calculation should use the measure which best reflects the economics of the business. Where reported revenue includes substantial pass-through costs, concentration may be more meaningful when calculated against net revenue.
High concentration does not necessarily prevent a sale, but buyers may respond via a lower valuation, greater earn-out protection or additional diligence around the customer relationship.
5. Cash conversion
Cash conversion shows how effectively earnings turn into cash. For example:
Adjusted EBITDA: £1.2m
Operating cash flows: £1.0m
Cash conversion: 83%
Working capital is often the main driver of differences between cash flows and EBITDA. Growth in receivables, delayed billing, rising WIP or advance payments to suppliers can absorb cash even where the business is highly profitable.
Weak cash conversion does not always indicate poor performance. On the contrary, cash may be absorbed by rapid growth or temporary working-capital movements. However, persistent differences caused by overdue receivables, poor billing controls or continued underinvestment are more problematic.