What buyers look for in a business, and what they’ll pay extra for

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Something in our recent Switch market analysis got me thinking. There are more than 13,000 companies in the US owned by private equity firms right now that they would love to sell and can’t, with money tied up that they need to get back to investors.

These are the pros with ex-McKinsey deal teams and bankers on call, the whole bloody machine. Their model is to buy a company, improve it, and sell it. And even they’re finding the last part difficult.

What surprised me was that the deal data didn’t show prices falling across the board. GF Data, who track what private equity actually pays for companies in this range, had average multiples holding fairly steady. What changed was everything around the price. Buyers were committing more of their own money, and earnouts were showing up in more than a third of deals, with the median earnout around 31 percent of what gets agreed at closing. So you can get your number and still spend three years trying to collect it.

My read is that this puts more pressure on buyers to find businesses with profits they can trust and room to grow. Paying a premium needs a decent reason behind it, especially if they might own the thing longer than expected.

For businesses like yours and mine, I’d look at three things: pricing power, work customers will keep paying for as AI improves, and a team that can grow without the owner holding everything together.

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1. Pricing power: can you raise prices without losing customers?

Warren Buffett once said, “the single most important decision in evaluating a business is pricing power.” He went on to say that if you need a prayer session before raising prices 10 percent, you’ve got a terrible business.

I personally have definitely sat in a few of those prayer sessions. Everyone agrees the increase is needed. But nobody wants to be the poor bastard who tells the customer.

A buyer cares because rising costs have to go somewhere. If you can’t pass any of them on, they come out of your margin.

Customers stay for reasons you can build on. Your brand means something. You do something the other guys don’t. Your team knows their operation. Or leaving would mean retraining their people and untangling years of systems and history.

That last one gets overlooked. High switching costs have serious value.

But you need to know why customers stay. Look at your last price increase. Who accepted it? Who pushed back? Who left, and what did they actually say?

If you haven’t raised prices in five years, you probably know less about your pricing power than you think.

And if customers stay mainly because of their relationship with you, a buyer has to work out how much of that loyalty leaves when you do.

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2. AI exposure: what will customers still pay you for?

If the work you sell gets cheaper to produce, what happens to your business?

Maybe your margins improve. Maybe customers demand lower fees. Maybe they start doing some of it themselves. This is already happening in places. EisnerAmper, the accounting firm, has pointed at marketing agencies built on copywriting and design where buyers are pushing the price down, cause the tools can do a decent chunk of that work now.

I don’t have this fully sorted at Switch either. What I’ve done is get clearer about which parts of our work are exposed and start using the tools inside our own delivery.

Pick one service. What is the customer actually buying?

Some of it may be production: writing, designing, compiling, processing. Some may be knowing what to do in the first place, spotting a mistake, or taking responsibility when things go sideways.

If production costs dropped by half, what would the customer still want you to handle?

That’s a question worth thinking through before a buyer asks it.

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3. Platform value: can the team run a bigger business?

Private equity buyers often start with a platform company: a business they can use as the base for buying and combining other companies.

A platform can command a premium because it brings management and operating capacity the buyer would otherwise have to build.

That means a team with some depth. Financials that show where money is made by location, product, or service. A way to get new people productive without having them follow the owner around for six months.

Imagine adding 25 percent more work next quarter.

Who hires? Who trains? Who catches the mistakes? Who checks whether all that extra work is actually making money?

If the answer is you, you, and you, there’s a limit to what a buyer can build on top of the business today.

Plenty of good companies are bought as add-ons and folded into a larger operation. But if you want someone to pay extra for your capacity to grow, that capacity needs to exist before they arrive.

This is the competence trap we talked about in March. You keep taking things back because you can do them faster. Understandable. After a few years, though, everyone has learned to wait for you.

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Where I’d start

Ask yourself three questions.

1. If you left tomorrow, which customers would leave too?

2. What are clients paying you for today that they could soon do themselves?

3. If a big new customer landed next week, what would break first, and who would be the one fixing it?

You probably have a gut answer to each. Go check whether it’s right, by asking a customer, talking to your team, or trying the tools yourself and seeing what they can do.

At Switch, we work through these questions with business owners because they affect business value long before anyone makes an offer. If you want the longer list, we put together the questions owners should ask before selling.