4/12 | Business Risks vs. Multiple
Business Risks That Impact Your Multiple
The "Rule of ONE": the risk that shrinks your check
In business valuation, the math is ruthless: the higher the risk, the lower the value.
And the most severe risk for an SME often comes down to a single digit. The 1.
In the previous article, we saw that price depends on the risk a buyer perceives.
Today, we name risk number one: dependence on a single point.
The "Rule of ONE"
Is your success built around:
One major client generating the bulk of your revenue?
One key supplier, with no backup?
One star product or service?
To you, it might be a model that has run smoothly for 15 years.
To a buyer, it's a single point of failure.
What the buyer actually sees
A buyer isn't buying today's profits.
They're buying the probability those profits continue after you're gone.
If your business hangs by a thread (a client leaving, a supplier going under), that probability drops.
So does your multiple.
A concrete example:
EBITDA: $1M
Base multiple: 5x, so $5M
One client accounts for 40% of revenue
The buyer doesn't ask whether that client will leave.
They ask what's left if it does.
To protect themselves, they often cut 1x off the multiple.
5x becomes 4x. Your check goes from $5M to $4M.
Same profit. $1M less. Because of a single number.
How to flip the script
Diversification isn't just a survival strategy. It's a price lever.
A revenue base spread across several clients, suppliers, and products strips the buyer of their best negotiating arguments.
The fewer single points of failure you have, the more leverage you hold at the table.
Simon's Tip:
You don't need to eliminate every risk before you sell. Just the one or two most obvious ones. Every dependency you fix before the sale is one less discount the buyer can justify.
Your homework for this week:
Audit the "Rule of ONE." Client, supplier, product: where is your biggest dependency?
Ask the real question: if it disappeared tomorrow morning, what percentage of your profit would survive?
If you already have your Preliminary Valuation Report, see how improving your risk profile would move your estimate.
Next article → We move from risk to opportunity: how to benchmark against the best in your industry to spot the gains you're leaving on the table.