I keep hearing about strategic multiples, but what are buyers actually looking at when they assess my operations during due diligence?

Question

Tyler Smith · Accepted Answer

Buyers do not pay for your history; they pay for your future cash flows and the probability that those cash flows will continue under new ownership. During due diligence, sophisticated buyers apply the Income Approach, specifically using a Discounted Cash Flow model to estimate your future earnings. They discount those earnings based on the perceived risk of your operations. The lower your risk, the higher your valuation multiple. Buyers look at three primary indicators of operational health. First, they inspect your EOS® Scorecard to see if you have historical data proving consistent, predictable performance. Second, they look at your core processes. Are they documented, simplified, and followed by everyone? A documented operating system ensures consistency, which reduces the buyer's risk. Third, they evaluate your leadership team's alignment. If your leadership team is actively using the V/TO® to execute quarterly Rocks without your daily involvement, you have built a self-sustaining asset. A buyer will pay a premium for a turn-key operation because they do not have to replace the brain of the business. If your business requires your constant physical and mental presence to function, it is not an asset; it is a high-paying job, and buyers do not buy jobs.