Readiness Analysis

Company Size and Profitability

The size of the business is often defined by its revenue, whether derived by service or product sales. It acts as an important barometer to the extent and complexity of the business’s operations and its value. In service industries, the value of the business is commonly directly related to multiples of revenue as opposed to profitability.

In your assessment answers, you indicated the average annual revenue, of your business, over the last three years was between $1,000,000 - $5,000,000. Businesses of this size have typically developed some systems and processes that enable the business to operate without the owner's extensive involvement for delivering such services, or products, to its' clients or customers. Furthermore, with the addition of having a sustainable revenue model, these businesses are highly sought after by all types of buyers.

John, you indicated that the average profitability level of your company over the past three years was $100,000 - $500,000. Keep in mind, there are many other factors that go into what value a buyer is willing to attribute to a business within this range of profitability. A few examples are; the specific industry, the strength or weakness of the management team, cash flow history, earnings modelling, risk factors and the ownership of proprietary assets or attractive contractual agreements that may or may not be reported on a balance sheet. Because each individual business is different, we recommend caution in applying any standard rule-of-thumb valuation metrics.

You have also indicated that the average profitability level over the past three years has seen insignificant changes. When a company’s profitability has insignificant changes, careful consideration must be given to the specific reasons why earnings have been flat. You should determine whether the profitability pattern is similar or not, to that experienced by the industry at large, and develop a plan accordingly. This plan should also include strategies to generate 3-5 years of increasing profitability in order to demonstrate a positive growth pattern and attract a higher multiple in determining a business's transactional value.