Let me start with the conversation I have had more times than any other. An owner tells me what the business is worth, I ask how they got to that number, and almost always it traces to one of three places: a number a friend got for a different kind of business, a number they need to retire on, or a number they feel in their gut after thirty years of work. None of the three is what a buyer will pay.
A buyer pays for the future cash the business will throw off after you are gone, discounted for the risk that it will not. Your effort, your years, and your story built that cash, but the check is written against the cash itself. Everything in this book comes back to raising it and lowering the risk around it.
Two levers, and only two
Most businesses in the band I am writing for get valued the same simple way. Value equals your normalized earnings multiplied by a market multiple. Those are your two levers, and getting both right is how you stop guessing.
Lever one is the earnings number. For smaller, owner-run businesses, buyers talk about SDE, seller's discretionary earnings, which is your profit plus the one owner's salary and personal perks added back, because a single owner-operator's pay is really part of the return. Once a business is big enough to run without the owner and to support a real management team, the conversation moves to EBITDA, earnings before interest, taxes, depreciation, and amortization, which is the cash the business produces from operating before financing and accounting choices muddy the picture. Knowing which one applies to you matters, because a business at four hundred thousand of SDE and one at four hundred thousand of EBITDA are not worth the same, since the SDE business still has to pay a manager to replace you while the EBITDA business already does.
The word that matters most here is normalized. Your tax return is built to show the lowest legal profit, while a buyer wants the true earning power once you and your personal spending step out. A buyer's advisor adds back what is genuinely the owner's discretion, your personal car, a one-time legal bill, a family member on payroll who does not really work. It cuts both ways, though, and if you have been paying yourself nothing and doing three jobs for free, the buyer subtracts the cost of replacing you, and that hurts. This is exactly why I have always treated myself as an employee on a fair market salary, kept separate from the company, so my earnings number was already honest with nothing left for a buyer to discover and re-price.
Lever two is the multiple. This is where two businesses with the same earnings sell for wildly different prices. A business doing a million dollars of earnings might sell for three times or seven times, a four-million-dollar swing on the same profit. The multiple is set by risk and by how badly the buyer wants you. It goes up with earnings that grow steadily, recurring revenue rather than one-time projects, a management team so the business runs without you, a broad customer base, clean books, a defensible niche, and a growing market. It goes down when the owner is the business, when one or two customers are most of the revenue, when the books are messy, when earnings are lumpy, when the market is shrinking, or when there are legal and tax loose ends. Almost none of these come from working harder next quarter. Nearly all come from structure, and structure can be built on purpose, starting today.
Treat the gap between your number and theirs as a map
If your number and the market's number are far apart, that gap shows you exactly where the risk lives in your business, and therefore exactly what to fix in the two to three years before you go to market. I would rather you find it now, from me, for free, than find it in a lowball letter of intent two years from now.
Do not value it alone
When the stakes are this high, I want a professional, independent valuation in my corner before I ever talk to a buyer, built on my side rather than handed to me by the buyer. Hire the best accountant or a credentialed valuation advisor money can buy and have them build your normalized earnings and a defensible multiple. You would not perform surgery on yourself, so do not value the biggest asset of your life by yourself either. And one honest note. Any multiple you read, in this book or anywhere, is a range rather than a single number, because your size, growth, and customer mix all move it. Treat the range as the truth, and work the specific figure for your business with your own advisor.
Chapter 2 checklist
- Write down the number you currently believe your business is worth, and exactly how you got to it. Be honest about the source.
- Decide whether you are valued on SDE (owner-run) or EBITDA (runs with a management team). If you are unsure, you are probably still in the SDE band, and that itself is a finding.
- Build a normalized earnings figure. List every add-back and every subtraction, including the real cost to replace what you personally do for free.
- List the five things most pulling your multiple down. Be ruthless and specific. That list is your readiness plan.
- Pay for one independent, professional valuation before you talk to any buyer, and treat the gap between your number and theirs as your to-do list.