What lowers the value of a business?

The eight issues that most often cut what a buyer will pay for a small business, how to spot each one in your own numbers, and what to do about it.

Buyers pay for earnings they believe will continue after you leave. Anything that makes those earnings look fragile lowers the multiple, and sometimes ends the deal. These are the issues that come up most often.

Quick version: the biggest value killers are relying on a few customers, relying on the owner, and books a buyer cannot trust. All three can be fixed, but each takes a year or more.

1. Customer concentration

If a handful of customers make up most of your sales, losing one could wipe out a large share of profit.

Check: what share of sales comes from your top one and top five customers?
Warning sign: one customer above about 15% to 20% of sales, or the top five above half.
Fix: win more mid-sized customers and put your largest ones on written contracts.

2. Owner dependence

If you hold the key relationships, do the quoting and make every decision, the buyer is not buying a business. They are buying your job.

Check: could the business run for a month without you?
Warning sign: customers call your cell phone and nothing is written down.
Fix: hand relationships to staff, document how work gets done and build a second layer of management.

3. Books a buyer cannot trust

Late, inconsistent or cash-heavy accounts make every number suspect. Buyers respond by discounting the price or walking away.

Check: are your accounts closed and reconciled within a few weeks of each month end?
Warning sign: personal expenses mixed in, large unexplained adjustments, tax returns that do not match the accounts.
Fix: monthly closes, separate personal spending and keep support for every add-back.

4. Flat or falling earnings

Buyers weight the recent trend heavily. One strong year after two weak ones is treated with caution.

Check: earnings for each of the last three years and the latest twelve months.
Warning sign: earnings falling while revenue holds, which means margins are shrinking.
Fix: find the cause early. Price increases, unprofitable jobs and rising labor costs are the usual suspects.

5. Margins below your peers

If similar businesses keep more of each dollar of sales, a buyer will ask why you do not.

Check: your gross and operating margins against industry benchmarks.
Warning sign: margins several points under the peer average with no clear reason.
Fix: review pricing, job costing and the mix of work you take on.

6. Working capital problems

Slow-paying customers and bloated inventory tie up cash. A buyer has to fund that, so they pay less.

Check: how many days it takes customers to pay, and how long inventory sits.
Warning sign: receivables stretching past 60 days, or a large balance owed by one customer.
Fix: tighten invoicing and collections well before a sale.

7. Key people and no contracts

If one or two employees leaving would damage the business, or customers and suppliers can walk at any time, earnings are at risk.

Check: who could not be replaced within three months?
Warning sign: no employment agreements, no supplier contracts, a lease about to expire.
Fix: written agreements, cross-training and retention incentives for key staff.

8. One-off revenue

Revenue you have to win again from scratch every year is worth less than revenue that repeats.

Check: what share of this year's sales came from repeat customers or contracts?
Warning sign: a few large projects make the year.
Fix: add service plans, maintenance contracts or subscriptions where your industry allows.

The market also moves your number

Some of what lowers value is outside your control. Higher interest rates reduce what buyers can borrow. Fewer active buyers in your industry means less competition for your business. You cannot fix these, but you can know about them and time decisions around them.

Common questions

Which issue matters most?

For most small businesses, owner dependence and customer concentration. They are the first two things a serious buyer asks about.

How long do these take to fix?

Clean books can be in place within a few months. Reducing owner dependence or customer concentration usually takes one to three years, which is why it pays to start well before you plan to sell.

How do I know which ones apply to me?

Measure them. A monthly value report tracks each of these drivers and shows which ones are moving your number.