Building a business is tough, at times challenging work that can take supreme dedication. Creating a business that can be easily sold is even tougher. What do potential buyers look for? Earnings, stability and longevity of earnings, plus financial ratios that assure the purchaser that the business has real legs.

Here are three ways to ensure that when the time comes, you have created enough value in your business so that buyers will want to buy:

1. Remember that Profitability Trumps Growth
   
   Many business owners struggle with the tradeoff between the creation of EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) and company growth. Often, owners are sorely tempted to place a lower priority on profitability in order to grow revenue through spending on product improvements, sales, or marketing.
   
   Growth is important, but it's a trap if you can't generate significant long term operating margins and profits. When margins are thin but the company is producing more revenue, management may start to latch onto growth as their permanent value metric. After all, isn't growth what people will pay for? Yes, but only after hard questions have been asked about the Gross Operating Margins and sustainability of the company.
   
   In thinking about long term value creation, evaluating your company's Gross Product Margins is a great way to start your analysis. If they are down in the 40% range (meaning that 60% of your revenue pays for product), the company may not generate enough to drive sales and marketing.
   
   Conversely, if product margins are high, but EBITDA is struggling, that's a good indication that the company's sales and marketing models may not be efficient. Growing sales revenue is great, but only if the other components of the business are in balance so that strong profits can be achieved.
2. Create Recognizable, Appreciable Value
   
   Everything about running a business becomes easier if people want to buy your product. The best way to create sales revenue and profitability is to sell something of value to your customer – and price it accordingly. Make sure your product and your marketing efforts are targeted specifically toward the creation and communication of that value – instead of trying to convince people that a product is better than they think it is!
   
   Some great examples in today's Internet market of how not to do this are the many new "Freemium" business models that measure their success on how many users they can get to use their service for free. These businesses depend on developing a profitable business with "Premium" services later, once enough traffic to the site has been generated. Giving away service becomes the near-term goal, and building true value in the "For Pay" elements of the service becomes secondary – with predictable results. When focus is placed on product value early and often, creating a business that people will want to buy follows more naturally.
3. Stay on Top of Your Financial Fundamentals
   
   Understand your Cost of Capital, as well as the cost of financing (or debt), which others will bring to a prospective purchase. Unless a business produces profits in excess of its cost of capital, it destroys value and wealth instead of creating it. This is a business fundamental that a surprising number of business owners tend to forget.
   
   What comprises your Cost of Capital? Start with your cost of debt (your interest rate) and then get an unbiased business valuation to gain an understanding of the true economic value of your business. Use that economic value to calculate a Cost of Equity. The two combined becomes a Weighted Average Cost of Capital (WACC) that historically has run about 12%. This means that if the company has borrowed money and is spending money on incremental business improvements that produce returns less than the WACC, the company is actually destroying economic value!
   
   Keep in mind that someone else is likely to purchase your business with at least some debt as well. If the going rate for corporate finance borrowing is 8%, how does your EBITDA compare to that? If it's also running at 8% (meaning that the cost of debt = value produced) why would someone want to purchase?

By paying attention to your margins, product value, and cost of capital, your chances of realizing a high valuation for your business – which then leads directly to a successful sales price – will be substantially improved.

About the Author: Guy Cook is a Senior Partner at CreationWave, a consulting group focused on client growth and profitability results. He has held executive management positions at a number of high-tech, high-growth ventures, including CEO of SuperNet, which was sold to Qwest Communications for $24M. Mr. Cook thoroughly understands business valuation and currently consults with ValuSource.