Valuation and the Return on Investment Puzzle

Valuations can vary tremendously from deal to deal, with the quantum of any offer subject to a wide range of influences, including critically, the acquirer’s view of their ultimate Return on Investment from the purchase.

If you speak to any sell-side advisor/consultant working on deals involving companies sold in the £5m to £50m range, they will not only confirm the above, but anecdotally point to all the elements that undoubtedly sway an acquirer’s decision on value – something we refer to as the ‘Return on Investment (ROI) Puzzle’.

So, what is the ‘ROI Puzzle’ you ask? It is the net effect of a variety of elements that, when present in a company sale, can and will motivate an acquirer to not only submit an offer for your business, but will undoubtedly also significantly increase the overall valuation.

One piece of the puzzle includes (but is not limited to) those elements directly related to the financial performance of the business. For example, this can include adjustments to the Operating Profit (or EBIT), commonly known as Add-Backs, which can result in an increased deal valuation by demonstrating the future profitability of the business without the departing shareholders’ costs.

High value contracts can be another attractive piece of the puzzle. These contracts confirm to an acquirer that there is an underlying robustness to the business. Often, high value contracts feature as a small element of an SME’s turnover (perhaps 20%), however it is very often the security of having documented, customer commitments in the form of a contract that reassures an acquirer and boosts valuation.

Additionally, if the contracts result in a significant element of Annual Recurring Revenue (ARR) within the turnover mix, this can be the ultimate driver for delivering a significant ROI to an acquirer, resulting again in enhanced valuations and keener offers in the face of other competitive bids.

A low exposure to Customer Concentration is another element that can significantly boost deal valuations and buyer ROI, particularly if opportunities exist for the acquirer to focus on converting the existing customer base into higher value clients, through cross-selling or up-selling opportunities.

Being able to evidence the loyalty and commitment of the workforce can also be very persuasive in driving valuation, especially as much of the ROI sought by the acquirer in year one post-completion will be delivered by the existing team. Measures of employee absenteeism and productivity, the presence of expertise in sought after domains, such as engineering or software development, and a capable and experienced management team all will contribute significantly to the ‘ROI Puzzle’ and enhanced valuations.

Lastly, if the company is too heavily reliant on the departing owners this can be off-putting for a potential acquirer, particularly if all the customer relationships sit with those shareholders looking to exit in the short term. Nothing threatens the promise of ROI more than an individual holding all the customer relationships and then planning to leave three months after the sale.

Ultimately, the ‘ROI Puzzle’ is unique to each business and company owners must take advice from reputable sell-side consultants, with a solid track record of deals, a deep understanding of how to create a market around the sale and knowledge of how best to present a complete and positive picture of the business to the marketplace.


As a long-established premium provider of business sale advisory services to UK businesses, EvolutionCBS offers business owners a complimentary and confidential discussion on how their specific objectives could be met and provides pragmatic, practical advice on how to begin preparing both themselves and their businesses for future sale or investment. 

EvolutionCBS works with owners of UK businesses in any sector, finding buyers from around the world through highly targeted research and supporting clients with dedicated Director-led teams, at every stage of their journey to a successful sale or investment. 

If you are an owner or shareholder of a business and would like a no-obligation consultation on the sale of all or part of your business, please email: or contact us on Tel: 0118 959 8224.

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