Enterprise value is ultimately determined by buyers in the market, but business owners have significant influence over how their company is perceived and valued. Strategic actions taken in the months and years before going to market can meaningfully impact the outcome—sometimes by millions of dollars.
This guide examines the key value drivers that buyers prioritize, strategies for enhancing each, and how to time and sequence your value creation efforts for maximum impact.
Understanding How Buyers Value Businesses
Most private company transactions in the lower middle market are valued as a multiple of earnings—typically EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The seller's adjusted EBITDA is multiplied by a factor that varies based on numerous business characteristics to arrive at enterprise value.
Multiples in the lower middle market typically range from 4x to 8x EBITDA, with exceptional businesses occasionally commanding higher valuations. The specific multiple applied to your business depends on size, growth rate, industry, competitive position, risk profile, and market conditions at the time of sale.
Value creation therefore happens through two mechanisms: increasing the earnings base (the number being multiplied) and improving the multiple (the rate at which those earnings are valued). The most successful pre-sale strategies address both.
A simple example illustrates the compounding effect. Consider a business earning $3 million EBITDA valued at 5x, yielding $15 million enterprise value. If the owner can increase EBITDA to $3.5 million (a 17% improvement) while also increasing the multiple to 5.5x (a 10% improvement), enterprise value rises to $19.25 million—a 28% gain from the compounded effect of both improvements.
Revenue Growth: The Primary Value Driver
Buyers value growth. A business with 15% annual revenue growth will command a meaningfully higher multiple than one that's flat, even if current earnings are similar. Growth signals market opportunity, competitive advantage, and future potential.
The quality of growth matters as much as the quantity. Organic growth from existing operations—new customer acquisition, wallet share expansion, geographic reach—is valued more highly than growth from acquisitions or one-time events. Sustainable growth that can continue post-acquisition is worth more than growth that may have run its course.
Strategies for demonstrating growth potential include investing in sales and marketing to accelerate customer acquisition, expanding geographic reach into adjacent markets, launching new products or services that leverage existing capabilities, and demonstrating market share gains that signal competitive strength.
Document your growth story clearly. Buyers want to understand not just what growth you've achieved but why it happened and whether it can continue. A compelling narrative about growth drivers, market opportunity, and execution capability supports premium valuations.
Revenue Quality and Predictability
Not all revenue is valued equally. Recurring revenue—subscriptions, maintenance contracts, retainers—commands premium multiples because it provides predictability and customer stickiness. Transaction-based revenue, while valuable, carries more uncertainty about future performance.
Examine your revenue mix critically. What percentage is truly recurring versus one-time? What are your retention and renewal rates? How long do customers stay? Can you convert more of your business to recurring models?
Even businesses that aren't naturally subscription-based can often increase revenue quality. Service agreements, maintenance contracts, support packages, and retainer arrangements all increase predictability. Training and professional services can be packaged as ongoing relationships rather than one-time engagements.
Customer concentration is the flip side of revenue quality. High dependence on a small number of customers—particularly if any single customer exceeds 15-20% of revenue—creates risk that buyers will discount. Diversification strategies, while sometimes challenging to execute quickly, can meaningfully improve valuation.
Margin Improvement and Cost Optimization
Improving profitability directly increases the EBITDA base. Even modest margin improvements can have significant valuation impact. A 2% improvement in EBITDA margin on $20 million of revenue adds $400,000 to annual earnings—worth potentially $2 million or more in enterprise value.
Examine your cost structure for optimization opportunities. Are there vendors where renegotiation could yield savings? Processes that could be automated or streamlined? Overhead that's grown beyond what the business requires? Underperforming products or services that dilute overall margins?
Pricing is often the highest-leverage margin improvement opportunity. Many owner-operated businesses underprice their products or services, particularly those with long customer relationships where prices haven't kept pace with value delivered. Strategic price increases—implemented thoughtfully and positioned around value—can meaningfully improve margins with minimal volume impact.
Document the actions you've taken and results achieved. Buyers value management teams that have demonstrated ability to identify and execute operational improvements. A track record of margin enhancement signals capability that extends beyond the current owners.
Building Organizational Capability
A capable management team that can operate independently is among the most valuable assets you can develop. Buyers—particularly financial sponsors—need confidence that the business will continue to perform and grow after the owner reduces involvement.
Evaluate your leadership team objectively. Do you have strong functional leaders in operations, sales, finance, and other key areas? Can they make decisions independently? Have they demonstrated results without constant owner oversight?
Where gaps exist, invest in filling them well before a sale process. Hiring a strong CFO, sales leader, or operations manager 18-24 months before going to market gives them time to establish credibility and demonstrate results. A new hire weeks before launching a sale raises questions rather than building confidence.
Beyond individual leaders, consider organizational infrastructure. Do you have clear reporting structures, defined roles, and documented processes? Performance management systems, planning processes, and governance mechanisms all signal professional management. These elements may seem mundane, but they matter to buyers assessing risk.
Reducing Risk Factors
Anything that increases perceived risk reduces valuation. Buyers apply discount rates to risky cash flows, which mathematically translates to lower multiples. Identifying and mitigating your business's key risk factors can meaningfully improve how buyers value your company.
Common risk factors include customer concentration (addressed above), supplier dependency, key employee risk, legal or regulatory exposure, technology obsolescence, and competitive vulnerability. Each business has its own specific risk profile that buyers will assess.
Develop mitigation strategies for your most significant risks. If you're dependent on a single supplier, qualify alternatives. If key employees are critical, implement retention programs and document their knowledge. If technology is aging, invest in upgrades or develop a credible modernization plan. If contracts are expiring, work to extend them.
Not all risks can be eliminated—and sophisticated buyers understand this. What matters is demonstrating that you've identified key risks, developed thoughtful mitigation strategies, and managed them proactively. Naivete about risks is far more concerning to buyers than acknowledged challenges with clear responses.
Timing and Market Awareness
Market conditions and business performance cycles affect valuation. Ideally, you want to go to market when your business is performing well (or about to inflect positively) and market conditions favor sellers.
Business timing involves positioning your financial performance optimally. Going to market off a strong year, with momentum continuing into the sale process, supports premium valuations. Buyers will project recent performance into the future; strong recent results yield strong projections.
Market timing is partially luck, but some awareness helps. Periods of abundant capital, strong buyer demand, and favorable economic conditions support higher valuations. Industry-specific factors—consolidation waves, strategic buyer activity, favorable regulatory developments—can create windows of opportunity.
Working with experienced advisors helps optimize timing. They track market conditions, understand buyer appetites, and can advise on when conditions favor sellers. While no one can perfectly time markets, avoiding obviously unfavorable periods and capitalizing on strength positions you for better outcomes.
The Integrated Value Creation Approach
The most effective pre-sale strategies integrate these elements into a coherent value creation plan. Rather than addressing factors in isolation, consider how they reinforce each other.
Revenue growth enabled by management team development creates both earnings improvement and multiple expansion. Margin enhancement funded by price increases generates resources for growth investment. Risk mitigation through customer diversification improves revenue quality. Organizational capability building reduces owner dependency.
Begin with an honest assessment of where your business stands today across each value driver. Identify the highest-impact opportunities given your specific situation. Develop a sequenced plan that addresses priority areas within your available timeline. Execute consistently while maintaining the business performance that underlies everything else.
The goal is to present buyers with a business that is growing, profitable, well-managed, and positioned for continued success. Businesses that demonstrate these characteristics command premium valuations—not because of presentation or positioning, but because they genuinely represent superior investment opportunities.
