Debunking the Myth of Sales Volume in Business Valuation

by Jane Johnson

When it comes to selling a business, there’s a pervasive myth that increasing sales is the golden ticket to a successful sale. Sales is not the sole determinant of a business’s attractiveness to potential buyers. There are many other factors that can significantly impact the value of a business. Here are some examples of other aspects that potential buyers will consider when looking at a business.

Profitability Trumps Sales

Profitability is one such factor that often gets overshadowed by the obsession with sales. A business with soaring sales but minimal profits may not be as attractive to buyers as one with steady, sustainable profits. Buyers are interested in the bottom line — the cash flow that sustains the business and generates returns for owners. A business that can demonstrate consistent profitability is most often more valuable than one that relies solely on sales growth.

Don’t Overlook the Qualitative Factors

Qualitative characteristics play a significant role in determining business value. Factors such as market share, depth of management, operational efficiency and intellectual property can greatly influence a buyer’s perception of a business’s value. A well-run operation with solid processes and procedures in place is far more appealing than one that is chaotic and disorganized, regardless of its sales figures.

A holistic, strategic approach that focuses on optimizing all aspects of the business is key to maximizing its value in preparation for a sale. By emphasizing profitability, operational efficiency and other qualitative factors, sellers can position their businesses as attractive investments that should command premium valuations in the market.

Jane Johnson is co-founder, president and CEO of Business Transition Academy, Inc., an organization with a distinct mission: educating business owners about the intricate process of exiting their businesses. The organization’s publications include business-owner guide Maximizing the Value of Your Business – Getting the Most You Can for the Sale.