What is the value of my business is the first question most owners ask when they start thinking about selling.
It is a fair question, and the honest answer is that value depends on more than a simple multiple of profit. Two companies with the same revenue can be worth very different amounts.
I bought my first business back in 1990. For the past 26 years I have valued companies and guided owners through the sale process across Arizona.
In that time I have learned that most owners either overestimate or underestimate their number. Both mistakes cost money, and both come from not knowing how buyers actually think.
Key Takeaways:
- What is the value of my business comes down to earnings, risk, and what similar companies sell for
- Buyers pay for provable cash flow, not the number on your tax return
- SDE and EBITDA measure earnings in different ways, and the right one depends on your company size
- Risk factors like customer concentration can pull your value down fast
- You can increase business value before you sell with the right preparation
What Is The Value Of My Business Based On?
Value rests on three things. Your earnings, the risk a buyer takes on, and what comparable companies have sold for.
Start with earnings. A buyer wants to know how much cash the business really produces once you strip out one-time items and personal expenses.
Then comes risk. A company that runs without the owner and spreads revenue across many customers earns a higher price than one that leans on a single person or client.
Comparables round it out. When I value a manufacturing or distribution company, I pull data on what similar businesses actually fetched, not what sellers hoped to get.
Understanding Business Valuation Methods
Understanding business valuation starts with knowing there is more than one way to reach a number. Good advisors use at least two and compare the results.
Here are the three main approaches and when each one fits.
| Approach | How It Works | Best For |
|---|---|---|
| Income | Values the business on its future cash flow and risk | Profitable companies with steady earnings |
| Market | Compares your business to recent sales of similar companies | Firms in active sectors with good comparables |
| Asset | Adds up the value of assets minus liabilities | Asset-heavy or low-profit businesses |
Most lower middle market deals lean on the income and market approaches. The asset approach usually sets a floor rather than the final price.
No single method gives you a perfect answer. The real value shows up where the approaches agree, and a skilled advisor knows how to read the gap between them.
How Much Is My Business Worth? SDE vs EBITDA
When owners ask how much is my business worth, the answer runs through your earnings measure. And the two you hear most are SDE and EBITDA.
SDE stands for seller's discretionary earnings. It adds the owner's pay and benefits back into profit, which makes sense for smaller owner-run companies.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Buyers of larger companies use it because they plan to hire a manager rather than run the business themselves.
| Measure | What It Adds Back | Common Use |
|---|---|---|
| SDE | Owner salary, benefits, and discretionary costs | Owner-operated businesses |
| EBITDA | Interest, taxes, depreciation, amortization | Larger companies with a management team |
For most companies in the $2 million to $50 million range, buyers focus on adjusted EBITDA when selling a business. That number, paired with the right multiple, drives your price.
Lower middle market valuation multiples vary by industry, size, and growth. A stronger, less risky company earns a higher multiple, sometimes by a wide margin.
What Drives Your Number Up or Down
Two levers move your value. The quality of your earnings and the risk a buyer sees.
Quality of earnings explained simply means how believable and repeatable your profit is. Clean books and consistent margins raise buyer confidence and your price.
This is where adjustments come in. An adjustment corrects your reported profit to show true earning power.
Some adjustments raise your earnings, like removing a one-time legal cost or your personal auto expense. Others lower them.
Here is an example owners often miss. If you pay yourself $150,000 but a hired president would cost $250,000, proper valuation methods adjust owner pay up to market. That change reduces your earnings, and it is still an adjustment, not a benefit.
Risk cuts the other way. Heavy owner dependence, one giant customer, or aging equipment all pull your number down because they make the future less certain for the buyer.
How to Increase Business Value Before You Sell
You have more control over your number than you might think. Small moves made a year or two ahead can increase business value in a real way.
- Build a management team so the business does not depend on you
- Spread revenue so no single customer dominates
- Clean up your financials and fix inconsistent bookkeeping
- Document your systems and repeatable processes
- Address deferred maintenance on equipment and facilities
None of this happens overnight. But owners who prepare early almost always sell for more than those who rush to market.
FAQ
How much is my business worth?
Your business is worth what a qualified buyer will pay based on your provable earnings, your risk profile, and recent sales of similar companies. A proper valuation looks at adjusted earnings and applies a multiple that reflects your size and stability. A rough online calculator will not give you a defensible number.
How is the value of a business determined?
How is the value of a business determined comes down to combining earnings, risk, and market comparables. A good advisor uses at least two valuation methods and compares them. The final figure needs to hold up under buyer scrutiny, so the analysis has to be thorough and defensible.
What is the difference between SDE and EBITDA?
SDE adds the owner's full compensation back into profit and suits smaller owner-run companies. EBITDA measures earnings before interest, taxes, depreciation, and amortization and suits larger businesses run by a management team. Most companies in the lower middle market are valued on adjusted EBITDA.
What can I do to increase the value of my business before selling?
Reduce your dependence on any single owner or customer, clean up your financials, and document your systems. Fixing deferred maintenance and building a capable team also help. These steps lower buyer risk, and lower risk means a higher multiple.
How long does a business valuation take?
A thorough valuation usually takes one to two weeks once we receive your financial records. Complex businesses can take longer. The time invested up front pays off by giving you a number you can defend at the negotiating table.
Getting a Real Answer to Your Question
What is the value of my business is a question you deserve a clear answer to, and that answer is worth more than a guess or a quick formula. It shapes your retirement, your next move, and how well your sale actually goes.
The owners who do best are the ones who learn their real number early and use the time to prepare. Value is not fixed, and you can shape it.
Ready to find out what your company is truly worth?
Schedule a confidential market review and I will give you a clear, defensible answer to the question, what is the value of my business.
