Top Line vs. Bottom Line Growth: What Do Business Buyers Look For?

By Generational Equity


It is important that business owners begin to think like business buyers long before they reach the point of approaching them with their companies as part of the exit process.


Because some growth strategies could backfire on you and actually hurt your standing with some buyers.

Here is a quote that I heard recently:

Top line = Vanity…Bottom line = Sanity!

So simple yet so profound, especially when it comes to buyers. You see, far too often we encounter sellers that have focused for years on the company’s revenue growth with little concern for the bottom line.

Entrepreneurs are quite often their company’s best salesperson. But too often probably not their best cost accountant. Trust me, buyers are less concerned with your 10% growth per year than they are with the fact that during the same timeframe your profit margins have eroded at a 15% annual rate.

This is why it is vital to hire an M&A advisory firm like Generational Equity long before you decide to exit. We do two things at the outset that are critical:

  1. We recast your historical financials (usually back three years)
  2. We analyze your profit margins, comparing the business to industry norms

Preparing your bottom line before exiting your business

Recasting simply allows us to remove any items from your income statement (and balance sheet) that are not part of the normal operations of your business. These can include dozens of things and vary from client to client.

Since most business owners have worked with their accountants for years to legally suppress profits, recasting gives us an accurate starting point for bottom line analysis. Without doing this, you could significantly under-value your company when you decide to exit.

Secondly, after recasting we compare the clients’ profit margins to industry norms, looking for any anomalies that would suggest a need for improvement. This can be eye-opening for many of our clients.

Typically, what we find is that very few have ever analyzed their profit margins by client or product line. Often clients are building revenue at the sake of profitability, and our margin analysis can reveal if this is so.

Why are these steps so important when exiting a business?

Both recasting and analyzing your profit margins are vitally important parts of your exit planning process because these are what buyers will do when they open due diligence on your company. If they find recasting that is in your favor, do you think they will tell you? Nope. However, you can bet if they find your margins are low or dropping that they will definitely bring that up.

Now, you may have valid reasons for your margins being lower than industry norms in a given timeframe; however, if you are not prepared to explain why, most buyers will certainly adjust their offers for your business (and the adjustment won’t be an increase).

Certainly, there are lots of strategies to grow a company and most of them will, over time, enhance your value. However, many will not and it is these bad strategies you must avoid.

Want to learn how before you prepare your exit?

Set aside some time to attend one of our exit planning conferences that we hold around the country. The hours you invest at one of our meetings will provide the best return you have had in years at any conference you have attended. You will learn a great deal about building a truly buyer ready business, including strategies revolving around top AND bottom line growth.

For more information use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.