**Episode 11 of the Business Growth and Exit Strategies Podcast**
You could be highly profitable and still be worth less than you think.
Buyers do not purchase profit. They buy reliable profit. They are looking for consistency.
When you talk to business owners and practitioners, they like to celebrate profit. Buyers and investors ask a different question: how repeatable and how transferable is it?
If the earnings are fragile, the multiple starts taking dings and dents—even if the P&L looks great.
## Profit Is a Lagging Indicator
Profit reflects decisions you have already made, not what a buyer can count on moving forward.
Buyers pay for what they believe will persist after ownership changes. What is the probability that your team, your product, your service can do the same thing again with an increase next year?
If the answer is “I don’t know,” that illuminates concerns.
If you can say: I could leave for three months and next year the company will grow by 8, 10, 15, 20%—that puts you in a really good position.
Prepare for that conversation. When you sell a business, you will answer 300-400 questions. Be ready to say: at any given time, I could take three months off and the company runs without me.
## Unsustainable Profit Sources Get Discounted
These profit sources signal noise, not value:
– One-time wins
– One-time big contracts
– Temporary vendor discounts
– One-off price spikes
Buyers will see these and revert back to the mean.
There is somebody—a 23, 24, 25 year old MBA grad—sitting in a cubicle whose only job is to look at Excel files. They are exceptional at it. They sniff things out. They are looking for variance and risk.
Due diligence is done by a team: an accountant, a statistician, analysts. They assign value to the risk. Very rigid, very exact.
## One-Time Margin Distortions Create False Confidence
A single really good quarter can be a trap, especially if driven by timing, deferred expenses, or favorable terms.
They have heard the excuses. They have heard the stories. They have the playbooks.
## Key Person Risk Destroys Value
If profit exists because you are the owner, the founder, the rainmaker, the fixer, the closer—the buyer sees key person risk.
That turns into:
– Earn-outs
– Holdbacks
– Lower multiples
At the end of the day, it is just less money for you.
## Cost Cutting Can Shrink Value
Cost cutting can increase profitability, but it can also shrink value.
Cutting training, maintenance, marketing, or key hires will show up short-term for profit but increases operational risk. It causes questions: what happens if?
Use red team exercises in management meetings. What if we change this feature? What if we do a reduction in force? What harm will it cause?
## Quality of Earnings Over Quantity
Investors have a phrase: quality of earnings (Q of E). That is better than quantity of earnings.
Buyers want earnings that are clean, recurring, and supported by strong controls.
Lower profit with higher reliability can be worth more than higher profit with volatility.
## Profit Without Systems Does Not Transfer
A company that runs on heroics, memory, and informal execution—those profits are seen as accidental.
Systems turn profits into something a new owner can operate.
If you are selling a car, you want to turn over the keys and title and walk away. You do not want phone calls saying this broke or that is not working.
Systems stop that from happening.
## Profit Fragility Shows Up in Concentration
Watch for these danger signs:
– Too few clients
– One channel for sales
– One product
– One person driving all decisions or bulk of profit
The buyer sees risk and puts it all on you—lower multiple, earn-out, holdback, or clawback.
## The Black Boxing Problem
Black boxing is when an employee loves control but will not tell you what is going on. They hold back information because they want things done their way.
It could be a control issue. It could be they are bad at delegation. You have to spot who is black boxing information on your team.
Ways to gather intel:
– Side-by-sides where someone sits next to them
– Have them record what they do on Loom or screen capture
– If they are in the field, do a ride-along
At some point, you will have a decision. Either they play ball (very rare), you pay them to stay home, or you ask them to leave.
People blocking you from understanding roles and responsibilities are taking money out of your retirement.
—
📊 **Free Framework Assessments:**
– [SELL Framework (Revenue Quality)](https://scottsylvanbell.com/sell-framework)
– [SCALE Framework (Operational Readiness)](https://scottsylvanbell.com/scale-framework)
– [DRIVER Test (Execution Capability)](https://scottsylvanbell.com/driver-test)
🎙️ **Listen to this episode:**
Apple Podcasts: https://podcasts.apple.com/us/podcast/episode-11-why-profit-alone-does-not-equal-business/id1876771297?i=1000749397493
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YouTube: https://youtu.be/I6V4i0o-tJo
Podcast Transcript
Today we’re on episode number 11: Why Profit Alone Does Not Equal Business Value.
You can be highly profitable and still be worth less than you think. Buyers don’t purchase profit. They buy reliable profit. The word of the day is consistency.
Business owners celebrate profit. Buyers and investors ask, “How repeatable and how transferable is it?” If earnings are fragile, the multiple takes dings and dents—even if the profit and loss statement looks great.
Profit is a lagging indicator. It reflects decisions already made, not what a buyer can count on going forward. Buyers pay for what they believe will persist after ownership changes. The real question is probability. What is the probability that your team, product, or service can produce the same or better results next year without you?
If you can confidently say you could step away for three months and the company would still grow by 8%, 10%, or more, you’re in a strong position. That’s the kind of confidence buyers look for during due diligence. And you should be prepared to say it—and prove it.
Unsustainable profit sources get discounted. One-time contracts, temporary vendor discounts, unusual pricing spikes—these create noise. During due diligence, analysts look for variance and risk. There’s usually a very sharp MBA reviewing spreadsheets whose sole job is to detect inconsistencies. They rebuild earnings, assess risk, and assign value accordingly.
A single strong quarter can create false confidence. If it’s driven by timing, deferred expenses, or favorable short-term terms, buyers will normalize those numbers. They’ve seen the stories before.
If profit depends heavily on you—the founder as rainmaker, closer, or fixer—that creates key person risk. That risk turns into lower multiples, earn-outs, holdbacks, and clawbacks. In simple terms, less money for you.
Cost cutting can temporarily increase profit, but it can also shrink value. Cutting training, maintenance, marketing, or key hires may improve short-term margins while increasing operational risk. Red team exercises can help here. Ask, “What happens if we remove this? What risk does it introduce?” Model decisions before making them permanent.
Investors use the term “quality of earnings.” Clean, recurring earnings supported by strong controls are worth more than volatile, personality-driven profit. Lower profit with high reliability can be more valuable than higher profit with uncertainty.
Profit without systems doesn’t transfer. If your company runs on heroics, memory, or informal execution, buyers see accidental success. Systems make profit teachable and repeatable. Think of selling a car—you want to hand over the keys and walk away, not field constant calls about what broke.
Fragility shows up in concentration and dependency. Too few clients. One dominant sales channel. One product generating most revenue. One person holding all the knowledge. These create risk, and risk lowers valuation.
Profit that relies on special knowledge held by one person becomes personality-based. What happens if that person leaves? Gets sick? Moves on? Investors pay less for profit that can’t be taught or documented.
Watch for black boxing. That’s when someone hoards information, keeps processes in their head, and resists documentation. It may be about control or fear of replacement, but it blocks transferability. Address it through shadowing, recording processes, or ride-alongs. Ultimately, if someone refuses to document and cooperate, you’ll face a decision. Protecting your exit value may require tough choices.
Predictability turns profit into a premium multiple. If your industry average is 3x, you should be aiming for 4x or 5x by reducing risk and increasing reliability. Forecast accurately. Hit targets consistently. Reduce protective deal terms. Strengthen leadership depth, client stickiness, process maturity, reporting cadence, and governance.
Here’s a practical test: What happens if you step away for 60 days? Not just operationally—does profit hold? Pick one fragility driver this quarter—dependency, concentration, lack of documentation—and address it directly.
Sometimes you’ll need fractional support. Accounting, in particular, often runs behind. I believe books should be closed by the 8th, 9th, or 10th of every month. If January ends, numbers should be finalized by February 8th, 9th, or 10th. If needed, hire a fractional accountant to clean up reporting. Clean books remove excuses and reveal inefficiencies.
Ultimately, buyers don’t trust your stated profit at face value. They reconstruct it, adjust it, and test it. Your goal is to defend it with proof—history, systems, and consistency. Selling a business is a negotiation. The stronger your documentation and track record, the better your position.
You built the company. You deserve the maximum multiple. Make sure your profit is durable, transferable, and system-supported so it commands premium value.