What is your business actually worth in today's market? Understanding how buyers value private companies — and what moves the number up or down — is the foundation of a successful sale.
Most business owners have a number in their head. It's usually based on some combination of what they've heard from other owners, what they've read online, or simply what they need to retire comfortably. The market doesn't care about any of those things.
A buyer will pay what the business's cash flow supports, adjusted for risk, growth, and the alternatives available to them in the market. Understanding how that calculation actually works is the starting point for every owner who is serious about selling at the right price.
How Private Businesses Are Valued
The most common valuation method for established private companies is a multiple of earnings. The specific metric used — and the multiple applied — depends on the size and type of business.
SDE
Seller's Discretionary Earnings
Used for smaller businesses (typically under $2–3M in annual revenue or EBITDA). SDE adds back the owner's salary, personal benefits, and one-time expenses to net income. It reflects the total financial benefit to a single working owner.
Typical multiples: 2× – 4× SDE, depending on industry and risk profile.
EBITDA
Earnings Before Interest, Taxes, Depreciation & Amortization
Used for mid-sized and larger businesses. EBITDA represents operating profitability before financing costs and non-cash charges. It's the basis for most lower middle market transactions.
Typical multiples: 3× – 8× EBITDA, varying significantly by sector and quality.
What Affects the Multiple?
Two businesses in the same industry with identical revenue can trade at very different multiples. The multiple is the market's way of pricing risk. Here is what buyers are looking at:
Businesses with subscription revenue, maintenance contracts, route-based services, or long-term B2B agreements trade at higher multiples than those dependent on project-based or transactional revenue. Predictable, recurring cash flow reduces buyer risk and is directly reflected in the multiple.
If one customer represents 30% or more of your revenue, most buyers will apply a discount or require an earnout structure to protect themselves against the risk of that customer leaving post-acquisition. The ideal profile is no single customer representing more than 10–15% of revenue. Concentrated revenue is one of the most common reasons deals fall through or close at lower prices than expected.
A business that requires its owner to be present 60 hours a week to function is hard to transfer — and buyers know it. Businesses with capable management teams that can operate without the owner command significantly higher multiples because the risk of key-person departure is lower. If you plan to sell in the next 2–3 years, investing in your management layer is one of the highest-ROI preparations you can make.
Buyers want to see consistent earnings — not a single great year followed by volatility. They'll typically analyze 3–5 years of financial history and weight more recent years heavily. Improving margins and stable or growing earnings are positive signals. A single outlier year (in either direction) will be scrutinized and often recast.
A business that is growing commands a higher multiple than a flat or declining one, because buyers are in part paying for future performance. If your business has been growing 10–15% annually, buyers will factor that trajectory into their valuation — and they'll be willing to pay more for the forward potential. Stagnant growth isn't necessarily a disqualifier, but it limits the universe of buyers and the premium they're willing to pay.
Buyers — especially private equity and search funds — often pay a premium for businesses they believe can be scaled. Proprietary systems, strong brand recognition, defensible market position, and geographic expansion potential are all factors that can push a multiple upward. A business that is just a "good business" is worth less than a business that is a "good platform."
The Add-Back Process: Normalizing Earnings
Private business owners often run personal expenses through the business — a vehicle, a home office, excess owner compensation, one-time consulting fees. These items need to be "added back" to show buyers what the business actually earns under normalized conditions.
This process is called recasting or normalizing financials. Done correctly, it can meaningfully increase the earnings base on which the multiple is applied — resulting in a higher valuation. Done sloppily or dishonestly, it creates friction in due diligence and can kill deals.
We help owners think through their recast carefully and document add-backs in a way that holds up to buyer scrutiny.
What a Formal Valuation Looks Like
A thorough business valuation assessment for a lower middle market company includes:
3–5 years of income statement and tax return review
Normalization and add-back analysis
EBITDA or SDE calculation on a trailing twelve-month basis
Comparable transaction analysis for the specific industry
Market condition context for current buyer demand and deal flow
Preliminary price range and deal structure considerations
Important Note on Valuations
The most accurate valuation comes from taking a business to market. No desktop analysis can replace real buyer feedback. Our role is to prepare you with a defensible price expectation based on current market conditions — and then to test it against real demand.
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We'll analyze your financials, apply current market multiples for your sector, and give you a defensible, realistic valuation range. No obligation, no inflated promises.