Here are the top 17 factors that make a business worth buying

When it comes to assessing the value of a business, inexperienced buyers often make the error of relying solely on measurable metrics such as profit or turnover. However, these metrics alone do not provide a comprehensive and accurate understanding of the business’s true potential. 

While they are important, it is crucial to acknowledge the presence of non-measurable factors too, as these can dramatically influence the sale price. By considering all factors, you can gain a more holistic perspective and make a more informed decision regarding the true value of a business. 

Here are four important non-measurable metrics and 13 measurable metrics you should take into account before buying a business:

The top four non-measurable metrics

1. Does the business have an automated sales pipeline?

   Sales are the lifeblood of a business. If the business is dependent on the current owner’s contacts, relationships, or reputation to bring in new clients, its potential for growth may be capped. Every business must have a proven, scalable, and repeatable sales process. Without it, the acquisition of new business is haphazard and reliant on goodwill. Without a documented sales system in place, how will you acquire new business?

2. How ‘owner dependent’ is the business?

   Unless you plan on having an operational role in the new business, you’ll want a management team in place to keep the business running.  It, therefore, pays to ask the following questions:

   • How dependent is the business on the current owner? 
   • Can it succeed without their involvement? 
   • Is there a pipeline of leaders waiting in the wings to take over the senior roles? 

   As the buyer, you want an operation that can thrive without the business owner’s input. If the current owner is the business, and they leave, what are you really buying?

3. Who owns the intellectual property?

   Intellectual property is not just about the software or code the business creates. It extends to who owns the website design, the logo, the podcast episodes, the social media posts, the name of the business, and much more.

   When I sold my business, the new owners wanted written proof that we owned everything. For example, I had to track down the graphic designer who created my logo a decade earlier and get her to sign a deed of release to prove that we owned the designs. When you do your due diligence, remember to ask for proof that the business owns everything.

4. Does the business have good governance?

   Good governance may be difficult to quantify, but it serves as a valuable indicator of how well a company is managed. During the due diligence process, the numerous buyers who approached me to buy the business requested over 300 documents, including employee contracts, equipment leases, client agreements, and financial statements. While it was a challenging task to gather all these documents, we were able to promptly deliver.

   The buyer was impressed by our ability to have our affairs in order, which demonstrated good governance. This positively influenced the final sales price we negotiated. Lack of good governance in an acquisition can raise concerns and potentially affect the valuation of the business, which can be leveraged in your favour.

The top 13 measurable metrics

While non-measurable metrics are crucial, measurable metrics are equally important. To give you a snapshot of the key factors to consider, here are the top 13 financial metrics you need to take into account:

1. Net profit
2. Asset turnover
3. Strike rate
4. Annual contract value
5. Monthly recurring revenue/subscriptions
6. Average revenue per customer
7. Customer churn
8. Churn rate
9. Customer retention rate
10. Customer acquisition cost
11. Customer lifetime value
12. Conversion rate
13. Net promoter score

By evaluating both measurable and non-measurable metrics, you acquire a thorough understanding of what makes a business valuable. This comprehensive approach enables you not only to identify high-value businesses but also to pinpoint negotiation points that can lead to a favourable deal.

Kobi Simmat is the founder of Best Practice Biz and the author of the book How to Build a Business Others Want to Buy.