Exit planning
Why a Business That Runs on Its Owner Sells for Less
Saul Cohen explains why buyers pay for future cash flow and discount for risk, and why owner dependency is the risk that most often drags the price down.
EP248 - Business Operator to Strategic Investor and Acquisitions with Sau - The Business Growth Show
Video from Athin Cassiotis.
Generated from the canonical interview transcript and validated against source data by Guests on Air.
How do buyers decide what a business is worth?
Buyers pay for the cash a business will generate in future, then set a multiple based on how risky that cash looks to a third party. The more the profit depends on the owner, a few suppliers or a revolving team, the lower the multiple, even when this year's profit looks strong on paper.
Many owners believe a strong year of profit sets the price of their business. A buyer reads the same accounts differently, asking how much of that profit will still arrive once the owner has gone and how much could disappear with one lost customer or one key person walking out of the door.
Saul Cohen, an accountant and acquisitions adviser who began his career at PwC and has supported more than a hundred acquisitions, set out the buyer's logic on The Business Growth Show with host Athin Cassiotis. His view is simple: valuation rests on two things, the cash a business can generate and the risk attached to it.
That second part is where most owners lose money. Cohen described a profitable, fast-growing design firm that he expects to be valued at a fraction of what its numbers suggest, because the owners are the whole of the design. His advice is to decide what kind of business you are building before you plan any exit at all.
Key takeaways
- Buyers pay for future cash flow, and the multiple they apply reflects how risky that cash looks to them.
- Owner dependency is the most common risk, and it can cut a valuation from five or six times profit to two.
- Decide early whether you want a lifestyle business or a sellable scale-up, because each needs a different exit plan.
- Take a regular day out of the business to ask the questions a buyer or investor would ask about it.
1. How buyers actually price a business
Cohen breaks valuation into two parts. The first is the cash generating power of the business, which buyers usually express as profit. The second is the risk portfolio a third party takes on when they buy it. The familiar profit multiple is simply shorthand for combining the two into one number that a buyer can defend.
The multiple moves with risk, not with how hard the owner has worked. Larger businesses tend to earn higher multiples because they are seen as safer. A firm producing ten million in earnings can dip a little without wrecking a buyer's return, while a firm producing a hundred thousand could lose everything with one big customer, and buyers price that in.
For owners, the practical point is that profit alone does not set the price. Two businesses with the same earnings can sell for very different sums if one depends on a single customer, supplier or person. The owner who wants a better number has to reduce the risks a buyer will see, not simply push up this year's profit.
2. Owner dependency is the risk that costs the most
Cohen's example was a business he had met two days earlier: an interior design firm with around six million pounds of revenue, one point two million in profit, a strong reputation and steady growth. On paper it was a fine business. In practice the current owners were all of the design and the special spark that made the firm work.
A buyer would have almost no faith that the cash would continue once those owners left. Cohen estimated that a firm like that, free of owner dependency, might be worth five or six times profit. With the owners holding everything together, he expected something nearer two times, if that. The gap is the price of being indispensable.
In most cases, he said, the biggest risk is owner dependency; in many others it is weak revenue quality, heavy reliance on certain suppliers or high staff turnover. His advice is to name those risks honestly, ask an adviser to look at the business as a buyer doing due diligence would, and fix them before any sale process starts.
3. Decide what you are building before you plan the exit
Cohen's first step is a question many owners skip: do you really want a sellable scale-up? Building one means hiring a team, setting processes that work and creating a culture that runs without you. It is hard work, and he thinks many owners really just want a profitable lifestyle business that gives them flexibility.
The two paths need different exit plans. With a lifestyle business, he favours tax planning and steady extraction, building assets outside the company over ten to twenty years so the reward sits beyond the business. With a scale-up, more profit is reinvested to build the asset itself, and he believes the work can be done in two to three years.
Whichever path an owner picks, the habit that starts the shift is the same. Cohen takes a day out every month to work on the business rather than in it, asking what a real investor would ask. He also warns against defining a whole career by the exit, since flexible terms often produce the best deals for both sides.
