When small business owners consider selling, their first question is often about price: What is the business worth? Many sellers instinctively focus on revenue, assuming a company generating $5 million is more valuable than one with $2 million. However, this is not always the case. Buyers determine value by profit – not revenue alone – as well as other factors that come into play.
What buyers actually pay for
Revenue reflects the size of a business, but not necessarily its profitability. High revenue does not guarantee strong earnings. For example, a $5 million business with thin margins, high fixed costs, and inefficient operations may be worth less than a $2 million business with strong and consistent cash flow.
For this reason, most buyers focus on EBITDA (earnings before interest, taxes, depreciation, and amortisation). EBITDA provides an estimate of the cash the business generates after operating costs. When buyers refer to “four times earnings,” what they mean is four times EBITDA, not revenue. That’s why two businesses with the same revenue can have very different valuations. The key difference is the profit that remains after expenses.
The indispensable owner
If you personally manage all customer relationships, make all major decisions, or retain key knowledge without proper documentation, this creates a key person risk. Buyers want to acquire a business, not a role that disappears when you leave. Businesses with strong management teams, documented processes, and client relationships independent of the founder typically command higher prices. These things signal that a company can operate successfully after a transition.
With that said, you don’t need to be absent from your company to sell it. However, acquirers will assess how much of the business’s value depends on your continued involvement.
Other factors
Profitability is essential, but buyers also consider several other factors. The importance of each one depends on the buyer’s objectives.
Customer concentration is often evaluated. If a large portion of your revenue comes from only a few clients, the business is more vulnerable. A diverse customer base reduces that risk. Growth trajectory is also significant. Businesses with strong momentum often receive higher valuations than those that have plateaued, even if current financials are similar.
The strength of the team is absolutely critical. Buyers assess whether the business can operate without a founder’s direct oversight, and whether key employees are both capable and intend to remain.
Industry dynamics also influence valuation. Some sectors attract higher multiples due to growth potential or recurring revenue, while others face challenges that limit pricing regardless of individual company performance. The balance sheet is important as well. Buyers consider the assets included in the sale, as well as any liabilities or obligations they will assume.
There is no universal formula for valuation. For example, a SaaS company with 90% recurring revenue will be valued differently than a construction firm with project-based income, even if both have the same EBITDA. Context is a major factor in the calculation.
Getting the number right
Owners may enter negotiations with a price in mind based on a friend’s sale, an industry rule of thumb, or personal financial goals. These expectations can differ significantly from what buyers are willing to pay. Seeking a professional valuation before going to market helps to bridge this gap. It provides a realistic assessment of what the business may be worth, and reduces the risk of failed negotiations due to misaligned expectations.
How we approach it
Genshare values businesses individually. We’re buying companies that are already successful, not distressed situations or turnaround projects, so we’re not hunting for a bargain. A Genshare valuation reflects the sum of its parts: earnings, team, market, and trajectory.
If you’re interested in learning what your business might be worth, we’re always available to discuss it with you. There’s no obligation or pressure to sell. Sometimes, the answer is “not yet,” and that insight can be valuable too.
You can learn more about our acquisition criteria here.
