Why a scalable business is worth more to a prospective buyer

When the time comes to sell your business, one of the key things a buyer will be looking for is whether your business is scalable. If you can prove it is scalable, that profit margins will continue to increase over time, the valuation multiple will be higher and the more the potential buyer will be willing to pay.

Can you prove your business is scalable?

When the time comes to sell your business, one of the key things a buyer will be looking for is whether your business is scalable.

And if you can prove that your business is scalable, the higher the valuation multiple and the more any potential buyer will be willing to pay you for your business.

Why?

Because your company valuation comes from your ability to reliably predict profits into the future and to prove to a potential buyer that those profits will be sustained.

Or better still, continue to grow over time. 

And this is exactly what having a scalable business does to your profits.

What does ‘Scalable’ mean?

In essence, it means that your profit margins increase as your revenues increase.

In a less scalable business, costs increase at the same rate as sales.

Clearly, a business whose profits will increase as the business grows will be more desirable to a buyer, the multiple will be higher and the more a buyer will be willing to pay for it.

Example: A less scalable business

Labour intensive businesses such as professional services firms can be more difficult to scale as the services they provide usually need to be delivered by expert individuals.

And so to bring in more revenue they need to hire more expensive people.

So, costs stay the same – or go up – in proportion to revenues.

Example: A scalable business

In contrast, software businesses are often highly scalable.

Because while the cost to build the initial software is high, additional copies of the software can be reproduced for practically zero cost. So, as revenue increases, so does profit margin.

Does this mean that only software businesses are scalable?

Definitely not!

How can you prove your business is scalable to a buyer?

The key is to think about how you can take advantage of any economies of scale to increase your profitability as your revenues increase.

For example:

  • Can you automate any of your core processes to remove any staff intensive processes – particularly your sales process, or the onboarding of new customers and staff members?
  • Could you license any part of your business?
  • Could you offer a subscription model?
  • Could you franchise your business?
  • Could you expand to new markets or geographies and replicate what you’ve done already somewhere else with much lower start-up costs?
  • Can you outsource any core process to keep your internal costs down?
  • Could you invest in new machinery to make your processes more efficient?

Thinking about selling your business? Contact our Corporate Finance team

If you’re thinking about selling your business or securing an exit, Leonherman can help you. Contact our Corporate Finance experts today, in strictest confidence, to find out about our Corporate Finance services and to speak to one of our expert advisers.

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