Understanding Small Business Growth Rates: A Guide for Buyers and Sellers
Growth rates are a critical factor in business transactions. For sellers, strong growth rates can justify higher valuations and attract qualified buyers. For buyers, these metrics help assess both current value and future potential. and other entrepreneurs look to it to gauge future performance. Understanding growth rates is essential for both parties during negotiations and continues to be valuable for strategic decision-making after the sale.
Defining and Measuring Small Business Growth Rate
Whether you're buying or selling a business, the growth rate is one of your most important metrics. It measures the rate at which a business expands over a specific period. A positive growth rate can indicate a healthy business with strong potential, while a negative rate may reveal underlying issues that require attention—such as supply chain problems, lost partnerships, or market position deterioration.
The growth rate is calculated by comparing current metrics to previous ones. Both buyers and sellers should examine several types of growth rates:
- Revenue Growth: Measures the difference in sales or income generated—a key indicator of business health.
- Sales Growth: Tracks the changes in the number of units sold, helping understand market demand.
- Customer Base Growth: Reflects the growth in the number of new customers. It can also be used in digital marketing to track audience growth on a website or social media.
- Cash Flow Growth: Evaluates the increase in available cash generated—essential for understanding working capital needs.
- Employee Growth: Indicates the expansion of the workforce, often reflecting new job creation. It can also be used to monitor retention.
- Market Shares: Gives the percentage of sales the business has in a particular industry.
How to Calculate Growth Rate
Both parties should verify growth rates independently using this standard formula:
For example, if a business’s revenue was $200,000 last year and $250,000 this year, the growth rate would be: (250,000 – 200,000) / 200,000 × 100 = 25%.
What Is a Good Small Business Growth Rate?
While it can vary by industry, business model, and overall market conditions, a good growth rate generally falls between 10-20% annually. Consider these perspectives:
For Sellers:
- Strong growth rates can justify higher asking prices
- Consistent growth demonstrates good management and market position
- Recent improvements in growth can show untapped potential
For Buyers:
- Growth rates help project future returns on investment
- Historical patterns indicate sustainability
- Growth trends may reveal opportunities for improvement under new ownership
High-growth sectors (technology, e-commerce, healthcare) may exceed 20% growth, especially in early stages. Mature businesses usually show slower but more stable growth. Both scenarios present different opportunities and challenges for buyers and sellers.
Factors to Consider in Valuation and Due Diligence
Growth rates are a critical component of both business valuation and due diligence processes. Understanding how various factors influence growth helps buyers and sellers establish realistic valuations and conduct thorough due diligence. Consider these key elements when assessing a business's growth trajectory:
- Size of a Business: Larger companies often grow slower than smaller, agile businesses.
- Age of the Business: Startups are likelier to have higher initial growth rates than stable, more established firms.
- Industry: Some industries naturally have higher growth rates, while others grow more modestly.
- Economic or Market Conditions: Economic downturns can impact growth rates.
- Financial Position: Financially healthy companies can invest more in growth opportunities, which leads to higher growth rates.
Industry-Specific Growth Rates
Growth rates vary across industries due to differences in market dynamics, demand, competition, and regulatory environments. Different industries present varying opportunities and challenges:
High-Growth Sectors:
- Technology and e-commerce businesses often show 20%+ annual growth
- Higher valuations but greater potential upside
- Require thorough documentation to verify sustainability
Traditional Sectors:
- Manufacturing, utilities, or retail typically show single-digit growth
- Often more stable and predictable
- May offer better value for risk-averse buyers
Whether buying or selling a business, compare growth rates to industry standards while considering market conditions and company-specific factors. Sellers should be prepared to document and explain their growth story, while buyers should verify claims and assess future potential. Remember that past growth rates, while important, should be viewed alongside other factors like market position, operational efficiency, and potential for improvement.
Understanding growth rates is just the first step in determining a business's true value. Ready to see how your business's growth rate impacts its market value? Or curious about what you should pay for a business showing specific growth patterns? Discover what your business is worth with BizBuySell's BizWorth Calculator to get a quick estimate or a Business Valuation Report for benchmark analysis.