The Pillars of Value
A buyer is not buying last year's profit. Last year has gone. They are buying the probability that the profit carries on after you have handed over the keys and gone to the airport. Every question in due diligence is an attempt to price that probability.
Which is why two businesses earning identical profit can be worth very different money. Value is maintainable profit multiplied by a number. Profit sets the size of the prize. The pillars set the number.
What the model actually says
Nearly every owner thinks about value as one number: profit. Make more profit, be worth more. It is true as far as it goes, and it stops well short of the point.
A trade buyer, a private equity house or a management team funding a buyout is doing risk arithmetic. They are asking what happens to this profit when the person who currently holds it together is no longer holding it together. The less that answer depends on you, the higher the multiple, and the multiple applies to every pound of profit at once.
That is the leverage nobody uses. Profit work is additive. Multiple work is multiplicative. An extra ten grand of profit is worth an extra ten grand of profit. A pillar fixed is worth a proportion of everything.
The six pillars
1. Profit quality. Not how big the profit is, how believable it is. Can it be traced to invoices, contracts and a consistent margin, or does it need explaining? Every add-back you ask a buyer to accept is an argument you have to win, and buyers discount what they cannot verify. If the business has been run to minimise tax rather than to demonstrate earnings, that decision has a price and it is paid at exit.
2. Owner independence. The hard one, and the one that moves the number most. If the business needs you in it daily, a buyer is not purchasing a business, they are purchasing a job with your name still on it. The test is blunt: how long could you be genuinely uncontactable before something broke? A fortnight is a business. Two days is a job. Nobody pays a business multiple for a job.
3. Recurring revenue. Money that arrives without being re-won. Contracts, retainers, service plans, subscriptions, or a book of customers reordering on a rhythm you can evidence in the data. Contracted revenue arrives with the risk already removed, which is why it is treated so differently from a strong year of one-off project work.
4. Spread of risk. Concentration is priced as danger. One customer at 40 per cent of turnover means the buyer is really acquiring a relationship they have never met. The same applies to a sole supplier with no alternative, one salesperson who holds every account, and a landlord who can end the lease in eighteen months.
5. Documented systems. Whether the way you do things exists outside people's heads. Not a manual nobody reads. The handful of processes that decide quality, cost and delivery, written plainly enough that a competent new starter could follow them. This is what turns your business into something transferable rather than something merely observable.
6. Proven growth. Evidence, not ambition. A pipeline with numbers in it, marketing that produces enquiries on a predictable basis, a market with visible room. Buyers pay for a future they can see the mechanism for. They pay nothing for a forecast that starts at the point of sale.
Why this matters if you are never selling
Plenty of owners have no intention of selling, and dismiss all of this as somebody else's agenda. Look at the six pillars again. Every one of them describes a business that is easier, calmer and safer to own.
Owner independence is a holiday you actually take. Recurring revenue is sleeping in January. Spread of risk is not losing a third of your income in one phone call. Documented systems mean a resignation is an inconvenience rather than a crisis. You are not building the business for a buyer. You are building it so that it works, and a buyer happens to pay for exactly the same things.
A worked example
The figures below are illustrative arithmetic to show how the model behaves. Real multiples vary enormously by sector, size and deal structure, and nobody should read a number here as a valuation.
Take an engineering subcontractor turning over £1.4m with £180,000 of adjusted profit. The owner quotes every job personally, holds all the customer relationships, has one customer at 38 per cent of turnover, and sells nothing on contract. Suppose the guidance is a three multiple. That is £540,000.
The owner's instinct is to chase profit. Say a hard year adds £30,000 to the bottom line. At the same multiple that is £90,000 of extra value, and it cost twelve months of grinding.
Now price the alternative. Over two years: recruit an estimator at £42,000 so quoting leaves the owner's desk; convert the servicing work into twelve-month agreements, taking £220,000 of turnover from re-won to contracted; grow two mid-sized accounts so the largest customer falls from 38 to 24 per cent; write down the six processes that cause the most rework. Profit dips in the first year while the estimator beds in, then settles around £195,000.
The profit has moved by £15,000. Almost nothing. But the risk profile has changed on four pillars at once, and a buyer prices what they are actually taking on. Move from a three multiple to four and a half and the business is worth roughly £877,000 rather than £540,000.
Read that back. The hire that felt like a £42,000 cost was the single most profitable decision on the list, and it did not show up in the profit figure at all. That is the reason this model earns its place.
How to apply it this week
- Score all six pillars out of ten, honestly. Twenty minutes, on your own, no audience. Then take the two lowest. Those are your next eighteen months, not the pillar you enjoy working on.
- Run the fortnight test. Write down exactly what would break if you were uncontactable for two weeks starting Monday. Do not fix it yet. The list is the diagnosis, and it is usually shorter and more embarrassing than owners expect.
- Measure your concentration. Largest customer as a percentage of turnover. Top three combined. Largest supplier. Any single person who holds relationships or knowledge nobody else has. Four numbers, one afternoon.
- Split last year's revenue into contracted and re-won. What percentage arrived without you having to sell it again? If the answer is nought, that is your biggest available move, and it usually starts with an offer you already deliver informally.
- List every add-back. Every personal cost sitting in the business that you would ask a buyer to ignore. Take one off the list this quarter. Each one you remove is an argument you no longer have to win.
- Document one process. The one that goes wrong most often. Two sides of A4, written by the person who does it, checked by you. Do that monthly and in a year you have the pillar.
The mistake most owners make
Leaving all of it until they decide to sell. The pillars are trend evidence, not switches. A buyer looking at your accounts wants to see owner independence over two or three years, recurring revenue that has renewed at least once, concentration that has genuinely come down. Twelve months of hurried tidying reads as exactly what it is, and it invites a lower offer or an earn-out that keeps you in the building for another three years.
The second mistake is treating the business as a personal current account for a decade and then trying to unpick it in a hurry. The third is the quiet one: believing that because the business could not run without you, that proves how valuable you are. It proves the opposite. Being indispensable is the most expensive form of pride in business ownership.
The questions to sit with
- Out of 10, how much of what you have built could genuinely be handed to somebody else and still work?
- If you had to sell in eighteen months, which pillar would cost you the most money, and what would it take to start on it now?
- What proportion of last year's revenue would have arrived if you had done no selling at all?
- Which of the six pillars are you avoiding because fixing it means giving up something you enjoy doing?
This is the spine of the Exit & Value work. The point of it is not the sale. It is that the business you would have to build in order to sell it well is, almost exactly, the business you would most enjoy owning for the next ten years.
