Selling a business is a major decision that calls for a deep understanding of your company’s financial health. If you want to be confident in the future sale of your business it’s important to familiarize yourself with the key financial metrics that potential buyers will scrutinize long before you get that surprise call of interest from a potential buyer. This article spotlights three essential financial metrics you should grasp now to maximize the value of your business sale.
Metrics like MRR, normalized EBITDA and Net Revenue play a significant role in shaping your business’s valuation and appeal to potential buyers.
1. Revenue Consistency (especially if a SaaS business)
If your business is a fast-growing SaaS company and it has reached or is close to achieving breakeven, then MRR may be incredibly important in influencing your sale price. MRR represents the predictable, recurring revenue that the buyer can expect each month, which is highly valued by buyers for its stability and growth potential. A growing MRR is a sign of healthy, expanding customer base, which can be more attractive to buyers focused on growth rather than immediate profitability. For high-growth tech companies, MRR (or ARR) often takes precedence over EBITDA. Investors and acquirers are typically more interested in the potential for scaling the business, assuming profitability will follow as the company grows. Alternatively, for more mature tech companies or those not growing as fast, EBITDA becomes more critical as buyers shift importance to strong profit margins. In either case, buyers still want revenue to be solid and stable (a threshold standard) for valuations to be strong. Strategic buyers tend to prioritize MRR to integrate and scale the business with their existing operations.
2. Normalized EBITDA
A really important metric that applies to all businesses (not just SaaS) is Normalized EBITDA. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company’s profitability without the influence of financing decisions, tax environments, or accounting practices related to depreciation and amortization. It provides an indication of the business’s operational efficiency and its ability to generate profit from core operations.
Normalized EBITDA takes the metric a step further by adjusting for one-time, non-recurring, or unusual items that are not expected to continue in the future. These adjustments can include things like restructuring costs, litigation expenses, or unusually high executive bonuses. If you are paying yourself through dividends, for example, this cost would be added back in bringing EBITDA down. The goal of normalized EBITDA is to provide a more accurate reflection of the company’s ongoing, sustainable earnings, making it a more reliable figure for evaluating the true operating performance and future potential of a business. It’s a cleaner version that provides a clearer picture of what to expect moving forward.
Often a purchase price is tied to the most recent 12 months Normalized EBITDA and so this is number 1 for you to know. However, the 36-month Trailing Normalized EBITDA is likely to be requested by the buyer before the price is finalized so you need to dive deeper into the history to identify risks and opportunities to influence the sale price. Keep in mind buying a business is much more complex than buying a car and we all know there are surprises between the offer price and what the final sale price is. Preparation is key.
3. Net Revenue
Net Revenue is a key metric in M&A because it directly reflects both the financial performance and market positioning of the company. Depending on the business structure it can take on a different perspectives but ultimately it is commonly used in valuation, and due diligence, making it an essential factor in the decision-making process for buyers and sellers alike. Net Revenue provides a fundamental view of the company’s revenue-generating ability, which is vital for assessing the overall attractiveness and potential of the business in an M&A transaction. For high-growth sectors like technology, Net Revenue is a critical input of calculations as it relates to revenue multiples and allows buyers to compare the financial performance of companies on a like-for-like basis and it is measured over time, essentially measuring recurring revenue retention by customers on average over time. For all business models net revenue gives a more accurate picture of the actual income that a company is able to keep after accounting for returns, allowances and discounts.
When it comes to diving into these numbers, you don’t have to go at it alone. The experienced team at Numbercrunch is here to support and empower Canadian entrepreneurs to reach their business ambitions and beyond.
