RESOURCES - SME

What really determines the value of your business?

If you are thinking about selling your company — or simply want to understand its market value — you might assume the answer is simple: “It depends on profit.”

Profit matters. But it is not enough.

Buyers look at your company as a whole system, not just last year’s numbers.

They usually focus on four main areas:

• Risk and stability

• Profit and cash

• Market position

• Quality of revenue

1. Stability: How Risky Is the Business?

Before looking at profit, buyers ask: How safe is this investment?

They look at things like:

• Is the business too dependent on you as the owner?

• Do a few customers generate most of the revenue?

• Is there only one key supplier?

• Are there any legal or tax risks?

Even a profitable company can lose value if it is considered risky.

2. Profit: Is It Sustainable?

Buyers want to know if profits can continue in the future.

They examine:

• Real operating profit (without one-off or personal expenses)

• Cash actually generated

• Profit margins

• How much reinvestment is needed each year

The key question is: Can this company continue making money without constant extra effort or investment?

3. Competitive Strength: Why This Company?

A buyer will also ask:

• What makes this business different?

• Is the know-how difficult to copy?

• Is the company well known and trusted?

• Can it run smoothly without the founder?

If the business depends entirely on the owner, the value may decrease after a sale.

4. Revenue Quality: Not All Sales Are Equal

Stable, predictable income increases value.

Buyers prefer:

• Recurring or repeat customers

• Long-term contracts

• Loyal clients

• Stable demand

One-time projects or unstable sales patterns usually reduce valuation.

Final Thought

Your company’s value is not based on one number.

It depends on how stable, profitable, independent, and predictable it is.

The stronger these elements are, the higher the confidence — and the higher the potential price.

My company makes money. Isn’t that enough?

Many SME owners believe that strong annual profits automatically mean a high sale price.

In reality, buyers think differently.

They don’t just buy past results.
They buy future security and future potential.

Here’s what they really look at.

First: Can the Business Run Without You?

If you are involved in:

• All key client relationships

• Important technical knowledge

• Major decisions

Then the business may appear risky once you step away.

The more independent your company is, the more valuable it becomes.

Second: How Predictable Is the Income?

Imagine two companies with the same profit:

• One has recurring contracts and loyal customers.

• The other depends on finding new projects every month.

Most buyers will pay more for the first one.

Predictability reduces risk — and lower risk increases value.

Third: How Solid Is the Structure?

Buyers will check:

• Customer concentration

• Supplier dependence

• Legal or tax issues

• Stability of margins

• Cash flow consistency

If any of these areas are fragile, valuation can decrease — even if profits look good.

Fourth: Does the Business Have a Clear Advantage?

Strong value usually comes from:

• A good reputation

• Unique expertise

• Barriers to competitors

• Stable management

These elements are often more important than a single good financial year.

In Simple Terms

Business value = Profitability

• Stability

• Independence

• Predictability

If you strengthen these four areas before selling, you increase your chances of achieving a better price.

Warranty & Indemnity insurance for business acquisitions

In mergers and acquisitions, one of the main concerns for a buyer is the possibility that the target company may have undisclosed liabilities or that certain contractual assurances provided by the seller may later prove inaccurate.

To mitigate this uncertainty, many transactions now incorporate a specialized insurance product known as Warranty & Indemnity (W&I) Insurance.

What Is W&I Insurance?

Warranty & Indemnity insurance is designed to protect one of the parties to a transaction from financial losses resulting from breaches of representations and warranties contained in a share or asset purchase agreement.

There are two principal structures:

• Buyer policy – The insurer compensates the buyer directly if a warranty breach results in financial loss.

• Seller policy – The insurer reimburses the seller for amounts they are required to pay to the buyer under a valid claim.
  
  

In modern deal practice, buyer policies are generally preferred because they provide direct recourse to the insurer.

Typical Areas of Coverage

While coverage depends on the specific policy wording, W&I insurance frequently addresses risks such as:

• Inaccurate financial disclosures

• Tax exposures not identified during due diligence

• Undisclosed litigation or contractual disputes

• Regulatory non-compliance

• Intellectual property ownership issues

Common Exclusions

W&I policies do not cover every potential risk. Standard exclusions often include:

• Matters known to the buyer before signing

• Fraudulent or intentional misconduct

• Certain environmental exposures

• Previously assessed penalties

• Unrecorded employee benefit obligations

Key Benefits

For buyers

• Enhanced financial protection

• Increased certainty of recovery

• Greater flexibility in negotiating liability caps
  
  

For sellers

• Reduced post-closing exposure

• Faster access to sale proceeds

• Cleaner separation from the business
  
  

For the overall transaction

• Streamlined negotiations

• Reduced need for large escrow accounts

• Smoother completion process

Considerations

• Premiums typically represent a percentage of the insured amount (1-3%).

• Insurers conduct underwriting and review transaction documentation.

• Insurance complements, but does not replace, thorough due diligence.

Final Thoughts

W&I insurance has become an important mechanism in sophisticated M&A transactions. By reallocating risk to a third-party insurer, it enhances certainty and can significantly facilitate deal execution for both sides.