If you own a business and have ever thought about selling it, chances are one question came before almost everything else: How much is my business actually worth?
It sounds like a simple question. But valuing a privately held business is very different from looking up the value of a home or checking the price of a publicly traded stock. Two businesses with exactly the same annual revenue can have dramatically different values.
Why? Because buyers aren't simply buying revenue. They're buying cash flow, systems, employees, customers, reputation, assets, growth potential — and ultimately the ability of the business to continue producing income after the current owner leaves.
Understanding that distinction is one of the most important steps you can take before putting your business on the market.
Revenue Is Not the Same as Value
One of the most common misconceptions we hear from business owners is: “My company does $2 million a year, so it should be worth $2 million.” Maybe. But maybe not.
Gross revenue tells us how much money comes into the business. It doesn't tell us how much money the business actually produces for its owner.
Consider two companies that each generate $2 million in annual revenue. Business A produces $500,000 in owner benefit. Business B produces $150,000. Even though their revenue is identical, a buyer is likely to look at those businesses very differently.
That's why business brokers, buyers, lenders, accountants, and valuation professionals spend so much time analyzing earnings and cash flow.
Understanding SDE
For many small and privately held businesses, one of the most important numbers is Seller's Discretionary Earnings, commonly called SDE. SDE is designed to estimate the total financial benefit being generated for one owner-operator.
It generally begins with the company's reported earnings and may include certain legitimate adjustments, often called add-backs. Depending on the business and its financial statements, examples might include:
- Owner compensation
- Certain owner benefits
- Interest
- Depreciation and amortization
- Certain one-time or non-recurring expenses
- Some discretionary expenses
This does not mean every expense an owner wants to add back will automatically be accepted by a buyer or lender. Add-backs need to be reasonable, supportable, and documented.
That's one reason clean financial records become incredibly important when you're preparing to sell.
What About EBITDA?
Larger businesses are often evaluated using EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. Whether SDE or EBITDA is the more appropriate measurement depends on the size, structure, management requirements, and nature of the company.
This is also why simply applying an online “industry multiple” to your revenue can produce a misleading valuation. You first need to understand what earnings number should actually be multiplied.
How Business Valuation Multiples Work
Once normalized earnings are established, comparable businesses and market data can help determine an appropriate valuation range.
You may hear someone say: “Businesses in my industry sell for four times earnings.” That's a starting point — not necessarily a valuation.
A hypothetical business generating $300,000 in SDE at a 3× multiple might suggest a value around $900,000. But the real question is: why should a buyer pay that multiple for this particular business? That's where the quality of the business becomes extremely important.
What Can Make a Business More Valuable?
Buyers generally want to reduce uncertainty. The easier it is for a buyer to understand how the company operates and believe that its earnings will continue after the sale, the more attractive the opportunity may become.
- Consistent or growing financial performance
- A history of stable earnings can give buyers greater confidence than a business with significant unexplained fluctuations.
- Recurring or predictable revenue
- Contracts, memberships, repeat customers, subscriptions, or other recurring revenue models may make future cash flow easier to evaluate.
- A strong management team
- If the company can operate without the owner handling every decision, customer relationship, or daily task, the business may be easier to transition.
- Documented systems and processes
- Standard operating procedures, employee responsibilities, customer systems, vendor relationships, and documented workflows can reduce dependence on the seller.
- A diversified customer base
- If one customer represents a substantial portion of revenue, losing that customer could significantly affect the business.
- Transferable relationships
- Leases, vendor agreements, customer contracts, licenses, and other important relationships may affect a buyer's ability to continue operating the company.
- Growth opportunities
- Buyers aren't only looking at where the company has been. They're also asking where it can go next.
What Can Lower the Value of a Business?
Some issues don't necessarily prevent a business from selling, but they can affect price, financing, deal structure, or buyer interest. Common examples include:
- Inconsistent financial records
- Declining revenue or earnings
- Heavy dependence on the owner
- Significant customer concentration
- Unclear or unsupported add-backs
- Employee instability
- Lease problems
- Deferred equipment or facility expenses
- Undocumented cash transactions
- Pending legal or regulatory issues
- Large differences between tax returns and internal financial statements
The earlier these issues are identified, the more opportunity an owner may have to address them before going to market.
Your Financial Records Matter
If you're considering selling, one of the first things a business broker will typically want to review is your historical financial performance. That may include documents such as:
- Profit and loss statements
- Business tax returns
- Balance sheets
- Year-to-date financial statements
As the transaction progresses, buyers and their professional advisors may request significantly more information during due diligence. Clean, organized financials don't just make the transaction easier — they help tell the story of the business.
What Is Your Business Worth to a Buyer?
There's another important distinction owners sometimes overlook: there is a difference between what you need from the sale and what the market is willing to pay.
Maybe you need $1.5 million to retire. Maybe you've invested $2 million into the company over the last twenty years. Maybe another owner in your industry told you their company sold for five times earnings. All of those things may be meaningful to you.
But ultimately, buyers evaluate the economics and risk of the business they're purchasing. A good valuation process helps bridge those two perspectives.
Financing Can Affect Marketability
Valuation doesn't exist in a vacuum. Many business acquisitions involve third-party financing, including SBA-backed financing. The SBA's 7(a) program can be used for qualifying changes of ownership, meaning lender considerations can become an important part of certain business acquisitions.
A business may look attractive on paper, but the financial performance still needs to support the structure of the transaction. That is another reason we believe owners benefit from understanding value before taking their business to market.
You Don't Have to Be Ready to Sell Today
One of the best times to understand the value of your business is actually before you need to sell it. Maybe you're thinking about selling this year. Maybe it's three years away. Maybe you aren't sure you want to sell at all.
Knowing where your business stands today gives you the opportunity to ask a much better question: what could I do now to make this business more valuable later?
Sometimes improving value isn't about increasing revenue. It may mean reducing owner dependence, cleaning up financial statements, documenting processes, developing managers, diversifying customers, renegotiating a lease, creating recurring revenue, or simply giving the business enough time to demonstrate consistent performance.
Thinking About Selling Your Business?
At BizBuy Network, we help business owners understand where their company stands, prepare it for market, confidentially connect with qualified buyers, navigate negotiations and due diligence, and work toward a successful closing.
The first conversation doesn't have to mean you're ready to sell. Sometimes it simply means you're ready to understand your options. Wondering what your business may be worth? Start with a confidential conversation with BizBuy Network.
This article is provided for general informational purposes only and should not be considered legal, tax, accounting, lending, or investment advice. Business owners and buyers should consult their own qualified professional advisors regarding their individual circumstances.