For What It’s Worth: Key Valuation Drivers

How much is a business worth? It’s a question as old as business itself that requires financial expertise and experience to answer. 

For business owners, especially those considering a sale, it can be difficult to see their business from the outside in, as a potential buyer or investor would—with the full context of comparable businesses and transactions, long- and short-term market trends, the cost of liquidity, and the returns potential buyers must generate.  

Yet having such an understanding is essential to highlighting a company’s strengths and the traits that truly set it apart from its peers and competitors. Here, Harris Williams draws on its experience helping business owners optimize their companies’ potential value and shares essential valuation drivers to consider for a successful outcome. 

Management team

“Strong management is far and away the top value driver in any business,” says Watkins. “It’s a universal factor, setting the most valuable companies apart from others across industries.”  

Watkins says financial buyers in particular place a high value on companies in which key leaders drive a healthy culture, a clear vision for the future, a roadmap to reach it, and a comprehensive succession plan to advance talent into the right spots.  

“Buyers are looking beyond the C-suite,” says Rozycki. “They want to see that all branches of the org chart are built out and ready for growth. Premium valuations go to companies with qualified people in place to step in and do the job when key employees leave.”  

Watkins points out that a variety of structures can work for management teams, from the traditional hierarchy model to multi-leader groups that equally share leadership responsibilities. “It’s the results that matter,” he says. “You can measure the quality of the management team by the company’s growth and financial performance.” 

Corporate infrastructure scalability

Buyers also place a premium on platforms that have the management team, IT systems, and financial reporting infrastructure in place to support future growth. Seasoned management teams have a strong track record of facilitating growth and innovation and have experience in successfully acquiring and integrating acquisition targets.  

“A specialty distribution business we advised is a good example,” says Watkins. “The company saw an opportunity to provide a better, more modern experience by steadily investing in customer-facing technology. By making it easier for customers to do business with the company, it cemented its leadership position and laid the groundwork for future organic and inorganic growth. That was very appealing to potential buyers.” 

Market leadership and a clear value proposition

True market leaders are rare, and that scarcity value is a key differentiator, having one of the largest impacts on valuation. Does the business have a unique and compelling portfolio of products or services that offer clear value to customers? Does it have an exceptional brand or customer service reputation? Does it have strong customer relationships that create a defensible market position? All these attributes will work in concert to drive interest and, ultimately, value.  

How to get there? “Market leaders tend to combine an unmet market need, a clear vision for meeting it, and disciplined execution,” says Watkins. “One business we have worked with several times over the years has had essentially the same strategy the whole time, adjusted for changing conditions, and it has systematically executed against that strategy. The company has attracted strong attention each time it has come to market because it’s been able to speak to that strategy and show its progress against its goals.” 

Organic growth

Organic growth speaks to the strength of the business and its sector, as well as to how the business is positioned within that sector. Businesses should highlight organic growth opportunities available to them through new products or services, new clients, or geographic expansion. It is important to show a cohesive strategy around implementation and to demonstrate a historical ability to execute on growth initiatives. 

Culture also plays a crucial role in organic growth, notes Rozycki. ““Many of our best growth stories have culture at their core,” she says. “One client, for example, built clear and concrete bottoms-up career paths for its employees. Although it was a very labor-intensive, hands-on industry, employees knew there were opportunities to go from doing the work, to managing projects, to running a branch. That made a dramatic difference in eliminating a ‘punch-the-clock' mentality, which resulted in better customer service, retention, and referrals. That, in turn, made the company a differentiated market leader and attracted strong buyer attention.” 

Revenue visibility

Growth is great, but visibility into future earnings is arguably better. Just as a broken clock is right twice a day, even subpar businesses can demonstrate a few periods of growth due mainly to external variables like market growth or short-term trends. Buyers covet companies with long-term contracts; deep backlogs; and recurring, nondiscretionary services that will provide decades of predictable revenue. 

“We worked with a large, multi-site residential services company with a successful subscription-based business model that provided potential buyers with significant visibility into future revenue,” note Jules. “It also had the infrastructure and data analysis capabilities to show past earnings and convincingly forecast future earnings, which was very compelling to potential investors. Even if a company isn’t going to market, that kind of transparency is enormously helpful for decision-making.” 

An attractive financial profile and profit margins

Just as important as a growing and predictable top line is an efficient financial operation that yields healthy margins. Savvy investors prioritize businesses with several years of continued growth and strong margin profiles compared to their peer set. They favor businesses that focus constantly on both cost and revenue and can adjust to cost fluctuations such as supply chain disruptions or inflationary inputs. Forward-looking statements should include compelling evidence that the business and its market have significant runway for continued growth.  

“Attractive financials are relative,” notes Harper. “They vary by sector, geography, company size, and other variables. What buyers want to see is a management team that can speak to the company’s growth and performance drivers and how to optimize them. The more specific, concrete, and actionable, the better.” 

A tangible M&A story

While organic growth shows a company’s ability to reliably bring the right offers to the right audience, inorganic growth shows the confidence to pursue step-change growth via acquisition. The demonstrated ability to identify and integrate M&A opportunities is often a key theme for financial buyers. An identified pipeline of opportunities increases excitement further. An M&A story will also help support the thesis that the company is a leader in an attractive sector with strong tailwinds behind it.  

“Buyers are looking for companies with deep relationships in their sectors, an understanding of how to create and cultivate relationships with potential acquisitions, and a reputation as an organization people want to join,” says Watkins. “Does this company have leadership that can assimilate new cultures? Does it have a track record of integrating and optimizing the performance of acquired businesses? Being strong on those fronts will give buyers confidence that the company will continue to grow and prosper via M&A.” 

Market size

Buyers will focus on the company’s current addressable market as well as opportunities to expand the total addressable market through adjacent end markets, modalities, and services. A larger addressable market is seen by buyers and investors as supplying multiple avenues to drive growth. In contrast, a highly fragmented market is also attractive, as it offers an M&A pipeline and an opportunity to build a platform through consolidation.  

“While a large and growing market is obviously attractive to buyers,” says Watkins, “not every company finds itself in that situation. Companies in smaller or lower-growth sectors can differentiate by showing they’ve thought about market adjacencies that could unlock additional growth. They can add value by providing consultative services in addition to basic products, or, like the example above, offer a better customer experience than the competition. There are many ways to find growth in almost any sector.”

Diversification of customers, geographies, and vertical solutions 

Most company founders can relate to the challenge of moving beyond their first big customer. Building a diversified book of business can be tough, but it yields significant benefits in terms of long-term growth and security. Likewise, too much dependence on a small number of products, services, or markets is a red flag to many buyers.  

Rozycki notes that while more diversification is generally better, it’s also important to accurately tell the company’s customer concentration story. “A well-known Harris Williams client had 70% of its business tied up with just three customers,” she says. “Those three buyers were Walmart, Amazon, and Target, which together covered a vast swath of the target market through multiple channels. Once buyers understood that dynamic, concentration became a non-issue.” 

What’s the story?

While each of these value drivers is important on its own, it’s the way they come together to tell a compelling story that sells the business. Most buyers are entrepreneurs too, and they are naturally drawn to the who, why, when, and how of a company’s success. 

When did the founders come up with the idea? Who were the first key hires? How has the business evolved over the years to become the leader it is today? What does it do to continue to differentiate, hold on to key customers, expand into new areas, and stay on the leading edge of its industry?  

When presenting the business to potential buyers and investors, owners should be able to tell a story around each of the valuation drivers highlighted here. This is where an advisor can be helpful, says Bill Watkins, a managing director at Harris Williams. “The advisor’s job is to use their firm’s industry knowledge and experience to tell the company’s story in the way that will maximize the value from each of the drivers and resonate with each individual buyer. A great advisor positions the business, tells the story effectively, connects the business with the right potential buyers and investors, and maximizes the competitive tension—all of which contribute to the valuation.”  

Ultimately the market determines the final value of a business. However, these factors plus a thoughtful engagement story can help drive that valuation to its maximum potential.


Harris Williams is an investment bank specializing in M&A advisory services. Our firm advises and advocates for clients worldwide through critical milestones and during the lives of their businesses to strategically create value—with passion, flexibility, and a commitment to detail. 

We collaborate as one firm across industry groups and geographic boundaries in a culture where every person is focused on our clients’ objectives. We are dedicated to execution excellence based on rigorous strategy that is specifically tailored to achieve success for our clients.  

As trusted thought partners to owners, management teams, and buyers, we forge enduring, valued relationships that deliver results.

To learn more, please contact our senior bankers.  

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