Welcome to Part Two of our series on preparing your business for a strong and confident sale.
In Part One, we explored the meaning of solvency, the importance of understanding your long term financial strength, and the basic steps to calculate your solvency ratio.
If you missed Part One, you can read it here.
This second article builds on that foundation by focusing on the practical and strategic side of long term financial health.
Here you will learn what strong financial stability looks like in the eyes of buyers, how you can improve your position before going to market, how buyers analyse long term strength during due diligence, and how you can use these insights to create a compelling value story that supports a higher selling price.
What a Good Solvency Ratio Looks Like
A good solvency ratio is one that clearly shows buyers your business can comfortably meet its long term obligations without financial strain.
While ideal numbers vary slightly by industry, most buyers consider a solvency ratio of 20%, or higher, to be a sign of healthy long term stability.
A ratio that reaches 30% or even 40% typically signals a very strong financial position and gives buyers confidence that the company can handle growth, expansion, and market shifts.
A higher ratio tells buyers that your business generates enough earnings to stay ahead of its long term liabilities.
It also signals responsible financial management, solid profitability, and a lower risk of debt related pressure.
When buyers see a solvency ratio that consistently sits above industry averages, they often feel more comfortable offering higher valuations because the long term financial picture appears safe and predictable.
A lower solvency ratio does not always mean the business is weak.
It simply means buyers will take a closer look at debt levels, income stability, and the long term financial plan.
For example, a company with a ratio under twenty percent may still be very profitable but may rely more heavily on debt to fuel growth.
While this is not always a red flag, it does require additional explanation and supporting documentation during negotiations.
Buyers also examine trends.
A solvency ratio that improves steadily over three to five years demonstrates strong leadership decisions and better operational efficiency.
It shows that the business is becoming more resilient over time, which can greatly increase buyer trust and reduce requests for price reductions.
In short, a good solvency ratio tells buyers that your company is both strong today and prepared for tomorrow.
It positions your business as a reliable asset rather than a risky investment.
How to Improve Your Solvency Ratio Before You Sell
Improving your solvency ratio before selling your business can significantly enhance buyer confidence and increase the valuation buyers are willing to offer.
The good news is that even small but strategic improvements can make a meaningful difference in how your financial strength is perceived during negotiations.
The goal is simple: Increase earnings and reduce long term liabilities so that the business looks safer, more stable, and more profitable in the long run.
One of the most effective ways to improve your solvency ratio is to pay down long term debt.
Even reducing a portion of it can immediately lift your ratio and show buyers that the business is operating from a cleaner and more secure financial foundation.
If refinancing allows you to replace expensive long term debt with more manageable financing, this can also contribute to a healthier ratio.
Another option is to strengthen profitability by focusing on high margin products or services.
Increasing prices slightly, improving operational efficiency, or eliminating low performing offerings can all boost net income.
Since net income is a key component of the solvency ratio formula, even a modest rise in earnings can result in a noticeable improvement.
For example, simplifying processes, reducing unnecessary expenses, or improving team productivity can create meaningful gains without major disruptions.
You can also improve solvency by increasing retained earnings.
This means holding on to a larger share of profits rather than distributing them.
Strong retained earnings help demonstrate long term financial discipline and give buyers the assurance that the business has a solid reserve to support operations.
Reviewing long term contracts is another strategic move.
Renegotiating supplier agreements, leasing terms, or service contracts can reduce long term liabilities in ways that directly strengthen your ratio.
Buyers appreciate seeing a business that actively manages its obligations rather than letting long term commitments stack up.
Finally, consistency matters.
Buyers want to see that improvements are not temporary.
If you can show a clear pattern of rising earnings, shrinking liabilities, or improving financial discipline over the past two or three years, your solvency story becomes much more compelling.
How Buyers Use the Solvency Ratio During Due Diligence
During due diligence, buyers want to understand how financially secure the business will be once they take over.
The solvency ratio becomes one of the most important indicators they review because it helps them evaluate long term risk.
While short term metrics show how the business is performing today, the solvency ratio reveals whether the company can handle the future with confidence.
Buyers begin by comparing the solvency ratio to industry norms.
They want to know whether your business is stronger, average, or weaker than similar companies. If your ratio is clearly above industry expectations, buyers often feel much more comfortable proceeding with the purchase.
It suggests that the company generates enough earnings to comfortably meet long term obligations, which significantly reduces their financial risk.
If the ratio is lower than expected, buyers dive deeper.
They examine long term liabilities line by line to understand what creates the financial pressure.
They may ask questions such as whether certain debts are close to maturity, whether refinancing is possible, or whether earnings are stable enough to support future obligations.
A lower ratio does not automatically stop a deal, but it does lengthen the due diligence process and often leads to more cautious negotiation.
Buyers also use the solvency ratio to assess how well the business could handle unexpected situations.
They consider whether the company could continue operating if market conditions shift, if revenue slows temporarily, or if costs rise.
A strong solvency ratio reassures them that the business has the resilience to weather these kinds of challenges.
Another important use of the solvency ratio is in lender communication.
Many buyers will rely on some level of financing to complete the acquisition.
Lenders pay close attention to solvency because it shows whether the business can support future loan payments.
If your solvency ratio is healthy, the buyer is more likely to receive favourable financing terms.
This can increase their confidence and willingness to pay closer to your asking price.
Buyers also look at trends over several years.
A consistently strong or improving solvency ratio shows strong leadership and responsible financial management.
A declining ratio may signal underlying issues that require explanation.
This trend analysis often becomes a central part of buyer discussions and influences how they shape their final offer.
Using the Solvency Ratio to Strengthen Your Value Story
Your solvency ratio is more than a technical figure in your financial statements.
It is a powerful storytelling tool that helps buyers understand the long term strength and reliability of your business.
When presented clearly and confidently, it becomes a way to differentiate your company from others on the market and justify a higher asking price.
A strong solvency ratio shows buyers that your business is built on a firm financial foundation.
It tells them that you do not rely heavily on long term debt to operate, that your earnings are healthy, and that you have enough financial flexibility to handle future challenges.
This kind of stability is incredibly attractive to buyers because it reduces uncertainty.
When buyers feel safe, they are far more likely to offer stronger terms and move through negotiations with fewer objections.
The solvency ratio also enables you to highlight responsible financial leadership.
If your ratio has improved over time, you can show buyers a clear pattern of progress.
For example, demonstrating rising earnings while long term liabilities remain stable or decrease helps buyers see that you have consistently strengthened the company.
These trends become part of your narrative as a well managed and forward thinking business, which increases buyer trust.
You can also use the solvency ratio to pivot conversations during negotiations.
If buyers attempt to lower the valuation because of market conditions or external economic factors, you can reinforce your position by pointing to your strong long term financial health.
This shifts the discussion from short term speculation to long term performance.
Buyers find it difficult to argue against clear evidence of financial resilience.
In addition, the solvency ratio supports your story of growth potential.
A business with strong solvency is better positioned to invest in expansion, take on new opportunities, and scale operations without facing financial strain.
Highlighting this potential helps buyers view your company not just as it is today, but as what it can become in their hands.
When used effectively, the solvency ratio becomes a strategic asset in your value story.
It adds credibility, clarity, and confidence to the narrative you present to buyers.
Final Thoughts
Long term financial strength plays a powerful role in how buyers evaluate your business.
By understanding what strong financial stability looks like, how to improve it, and how buyers analyse it during due diligence, you can present a far more persuasive and attractive value story.
These insights give you a real advantage when entering negotiation and can directly influence the selling price buyers are willing to offer.
This second article focused on the practical side of financial preparation.
If you want a deeper understanding of the concepts behind long term financial strength, make sure you also read Part One of this series, which explains the meaning of solvency, why it matters, and how to calculate the key figures that buyers review.
Preparing your business for a successful exit is much easier when you have the right guidance.
Elkridge Advisors is here to help you review your financial position, strengthen your value story, and present your company in the strongest possible light.
