When preparing to sell your business, one of the most important, yet often misunderstood, concepts is WACC, or Weighted Average Cost of Capital.
It might sound technical, but mastering this number can help you tell a stronger story to buyers and justify a higher valuation.
At Elkridge Advisors, we help business owners decode financial terms like WACC into actionable insights that directly impact their exit price.
What Exactly Is WACC?
Simply put, WACC measures the average rate a company pays to finance its operations, combining both debt (like loans) and equity (like investor capital).
It tells buyers how much return they can expect based on the risk of investing in your company.
To calculate Weighted Average Cost of Capital, you consider the proportion of debt and equity your business uses and the cost of each.
The formula looks technical, but in essence, it answers one key question: How much does it cost your company to use other people’s money to grow?
Let’s look at a quick example:
Company A finances its operations with 60 % equity and 40 %debt. The cost of equity is 10 %, and the cost of debt (after taxes) is 5 %.
When you combine these proportions, the company’s WACC is 8 %. That means Company A must generate at least an 8 %return on its investments to satisfy both lenders and shareholders.
Now compare that to Company B, which relies more heavily on high-interest debt — 70 %debt and 30 %equity. Its cost of debt is 9 %, and its cost of equity is 12 %. This pushes its WACC to around 10.5 %, making it less efficient from a capital standpoint and potentially less appealing to buyers.
The takeaway is simple: the lower your WACC, the more attractive your business looks.
It shows that your operations are well-managed, your financial risk is controlled, and investors can expect steady returns without excessive uncertainty.
Why WACC Matters When You’re Selling Your Business
When buyers assess your company, they don’t just look at revenue or profit, they also examine how efficiently your business uses its capital.
WACC plays a big role here because it acts as a discount rate when determining your business’s present value.
A lower WACC means your future cash flows are discounted less heavily, which increases your company’s valuation.
Conversely, a high WACC can make even strong profits appear less valuable because buyers perceive greater risk or inefficiency.
Here’s a simple example:
Company A and Company B both generate USD 2 million in annual profit. However, Company A has a WACC of 7 %, while Company B has a WACC of 12 %.
When buyers use Weighted Average Cost of Capital to discount projected cash flows, Company A’s future earnings are worth significantly more in today’s terms.
As a result, Company A could be valued at USD 20 million, while Company B might only reach USD 14 million — even though their profits are identical.
WACC also helps buyers compare investment opportunities.
A company with a lower WACC signals less risk and stronger operational efficiency, which often attracts more competitive bids.
Sellers who understand this can use it to position their company as a safer, smarter investment during negotiations.
How WACC Reflects Risk and Reward
WACC is a reflection of how risky buyers think your business is.
A higher Weighted Average Cost of Capital tells investors that your company’s returns must be higher to compensate for potential risks, while a lower WACC signals stability, predictable income, and smart capital management.
For instance, Company A operates in a stable industry with consistent cash flow and minimal debt. It has long-term contracts and a solid customer base. Its WACC sits comfortably at 7 %, showing that investors view it as a relatively low-risk, dependable business.
Buyers see this as a safe investment, which can justify a higher valuation multiple.
Meanwhile, Company B operates in a volatile sector and carries significant short-term debt. It has a few large clients that make up most of its revenue, and cash flow fluctuates throughout the year. Buyers view these factors as risky, leading to a WACC of 13 %.
That higher Weighted Average Cost of Capital means investors expect a larger return to offset the risk, which can drive down the company’s valuation.
This balance between risk and reward is central to buyer perception.
Even small improvements, like diversifying revenue streams, reducing debt, or improving margins, can lower WACC and make your business more attractive.
A difference of just one or two percentage points can translate into hundreds of thousands of dollars in final sale price.
The Connection Between WACC and Growth Potential
WACC also tells a powerful story about your growth potential.
It helps buyers understand how efficiently your company uses capital to expand, innovate, and generate long-term returns.
A balanced WACC means your company can fund new projects without taking on unnecessary financial risk, a clear sign of strong management and smart planning.
For example, Company A maintains a WACC of 8 %because it finances growth through a healthy mix of reinvested profits and long-term, low-interest debt.
This structure allows it to invest in new technology and expand into new markets while keeping risk under control.
Buyers see that as a business positioned for sustainable growth and are often willing to pay a premium for that stability.
On the other hand, Company B has a WACC of 12 %, largely due to short-term, high-interest borrowing.
The company wants to grow quickly, but its financing costs eat into profits and make future investments less efficient.
Buyers may view this as a sign that growth could slow once interest expenses rise or credit becomes harder to access.
A lower WACC signals to buyers that your business can fund growth more affordably, giving you a competitive edge in negotiations.
It also demonstrates that your company can scale without overextending, an essential trait in businesses that attract strong acquisition offers.
How Elkridge Advisors Helps You Use WACC to Strengthen Negotiations
At Elkridge Advisors, we don’t just crunch the numbers, we translate them into a compelling narrative that helps sellers justify their asking price with confidence.
WACC is one of the most powerful tools we use to shift the conversation from “how much are you asking?” to “why your business is worth it.”
Our team starts by analysing your company’s current capital structure: how much of your funding comes from equity, how much from debt, and what each costs.
We then identify opportunities to reduce financial risk and improve investor appeal before you ever enter the negotiation room.
At Elkridge Advisors, our goal is not just to explain WACC. It’s to use it as a negotiation advantage.
When buyers see that you understand and manage your cost of capital effectively, it builds credibility and shifts the balance of power in your favour.
Final Thoughts: WACC as a Storytelling Tool
WACC is a strategic storytelling tool that shows buyers how your business manages risk, funds growth, and creates value over time.
When sellers understand and use WACC effectively, they can transform complex financial data into a narrative that resonates with investors and buyers alike.
Think of WACC as the bridge between your company’s financial reality and its perceived potential.
A strong WACC story highlights that your business is not only profitable today but also structured to perform well tomorrow.
It communicates confidence, control, and vision, three traits buyers pay a premium for.
At Elkridge Advisors, we believe every seller deserves to walk into negotiations with that kind of clarity and confidence.
By aligning your financial structure with your long-term vision, WACC becomes more than a ratio, it becomes part of your success story.
