When planning the sale of your startup, there’s no denying the numbers matter. Buyers aren’t just interested in your brand story or how many hours you’ve put in – they want to see financial health. The better your financial metrics, the higher the potential valuation, which is, of course, exactly what you want when planning an exit. But getting those figures in tip-top shape takes time, effort, and, occasionally, a bit of creative thinking.

In this blog, we’ll explore the key financial metrics that can help you optimise the value of your startup before an exit and offer tips to ensure you’re presenting your business in its best financial light.

Revenue Growth: Show Stability, Not Just Peaks

Revenue growth is the bread and butter of any acquisition or investment decision. But it’s not just about having a good quarter or two – it’s about showing consistent, predictable growth over time. Buyers need to see that your business isn’t dependent on a few big wins but can sustain its upward momentum.

How to Improve Revenue Growth:

• Focus on Recurring Revenue: If possible, shift your business model to include more recurring revenue streams (think subscriptions or retainers). This makes future earnings more predictable and attractive to buyers.
• Diversify Revenue Sources: Avoid putting all your eggs in one basket. Explore new markets or products that can generate additional income streams, creating more security in your growth model.
• Track Month-on-Month Growth: Buyers love a good trend line. Make sure your financials show a clear and steady growth trajectory, rather than erratic peaks and troughs.

Gross Margins: Efficiency is Key

Gross margins are another key metric for potential buyers, as they indicate the efficiency of your business operations. High gross margins mean you’re running a tight ship and maximising profit relative to your costs. If your margins are a little on the slim side, now’s the time to look at where you can improve.

How to Increase Gross Margins:

• Optimise Pricing: Ensure your pricing strategy reflects the value you offer. If you’ve been hesitant to increase prices, consider a slight adjustment to boost margins, particularly if you’ve recently added value to your offering.
• Streamline Operations: Review your production or service delivery processes to identify any inefficiencies. Automating manual processes, renegotiating supplier contracts, or switching to more cost-effective tools can all improve margins.
• Cut Non-Essential Costs: Look at your expenses. Are there areas where you could trim the fat without impacting quality? Even small savings can add up and make a difference to your bottom line.

EBITDA: The Profitability Benchmark

EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortisation—is often used by buyers to assess the true profitability of a business. This metric strips away the financial nuances of interest and tax payments, giving a clearer picture of your operational performance.

How to Improve EBITDA:

• Control Operational Expenses: Keep a close eye on operational costs and identify areas where you can reduce spending. This could be anything from office space to software subscriptions – if it’s not adding clear value, it may be time to cut back.
• Negotiate with Suppliers: Whether it’s materials, services, or software, there’s usually room for negotiation. Approach suppliers with the aim of reducing costs or securing better terms – every bit helps.
• Increase Revenue Without Significantly Increasing Costs: If you can boost revenue without a proportional rise in expenses, your EBITDA will look much more attractive. Focus on high-margin services or products to make this happen.

Cash Flow: Keep It Healthy and Predictable

Cash flow might not be the most glamorous metric, but it’s crucial for buyers, as it shows how well you can meet short-term liabilities and invest in growth. A healthy cash flow ensures your business can survive lean periods and still meet obligations.

How to Optimise Cash Flow:

• Invoice Promptly: Make sure you’re invoicing customers as soon as possible, and consider offering discounts for early payments to encourage prompt settlements.
• Negotiate Payment Terms: Where feasible, negotiate longer payment terms with suppliers, giving you more breathing room when it comes to cash flow.
• Manage Inventory Efficiently: If you hold inventory, avoid overstocking. Excess inventory ties up cash that could be better used elsewhere in the business.

Audit-Ready Financials: Transparency Builds Confidence

One of the biggest turn-offs for buyers is murky, disorganised financials. If your financial statements resemble a maze, it’s time to tidy things up. Being audit-ready shows buyers you’re transparent and responsible, making the due diligence process smoother and faster.

Steps to Prepare Your Financials:

• Work with an Accountant: A good accountant will help you get your books in order and prepare them for the inevitable buyer scrutiny.
• Regularly Review Financial Statements: Make sure your balance sheets, profit-and-loss statements, and tax records are accurate and up to date.
• Fix Any Historical Issues: If there are any past financial discrepancies or red flags, address them now and have a clear explanation ready for buyers.

Wrapping It Up

Optimising your financial metrics ahead of an exit is essential for ensuring your startup gets the valuation it deserves. By focusing on revenue growth, increasing gross margins, improving EBITDA, and ensuring healthy cash flow, you can present your business in the best possible light to potential buyers.

Remember, preparation is key. Buyers will be looking at your financials with a fine-tooth comb, so having your numbers in order and being able to explain them confidently will put you in a strong position to negotiate the best deal.