By Christopher Clepp, ChFC® · Building Towards Wealth
How Is My Business Valued, and What Actually Drives That Value?
Almost all businesses are valued as a multiple of earnings, and the multiple is where the real money lives. Recurring revenue, owner independence, customer concentration, and growth all move that multiple far more than the top-line number you brag about at dinner.
Every owner I talk to has a number in their head. They heard it from a buddy who sold, or picked it up at a conference, or did some quick math on a napkin. “Businesses like mine go for such-and-such times revenue.” And they carry that number around like it’s a fact, right up until a real buyer shows them what their business is actually worth.
The number you heard at a cocktail party is rarely the number that shows up in a letter of intent. That’s not because somebody’s lying to you. It’s because valuation is more careful than the napkin version, and the gap between the two is where owners either get a nice surprise or a rough one.
So let’s talk about how this actually works. Not the conference version. The version that survives a buyer’s due diligence, because that’s the only one that ends up in your bank account.
The basic math
Here’s the framework, and it’s simpler than people expect.
Seller’s Discretionary Earnings. Profit with owner compensation and perks added back in — what the business throws off before you paid yourself.
Earnings before interest, taxes, depreciation, and amortization. Different acronym, same idea — what does this thing actually earn?
You take that normalized earnings number, multiply it by a range of multiples appropriate for your industry, and you’ve got a starting framework. That’s the whole skeleton of it.
But the skeleton isn’t where the money is. Two businesses with the same million dollars of EBITDA can trade for wildly different prices. The earnings get you in the room. Everything else sets the price. For the broader case on why every owner should have a real number instead of a napkin number, Business Owners Should Have a Valuation of Their Business makes the argument in full.
Why two identical businesses sell for very different prices
Picture two companies. Same industry, same two million in EBITDA. One sells at a meaningfully higher multiple than the other. Same earnings, different price. The buyer looked past the earnings and asked how good, how safe, and how repeatable those earnings actually are.
- Recurring, contracted revenue
- No single customer over 10% of revenue
- Business operates without the owner
- Growing trajectory
- Revenue re-won every quarter
- One customer over 20% of revenue
- Founder is the operating system
- Flat or declining trajectory
Stack those factors together and they explain most of the distance between a premium deal and a discount deal on identical earnings. The exact multiples are deal-specific and belong in the hands of a qualified appraiser, but the direction each one pushes is not a mystery.
“The earnings get you in the room. Everything else sets the price.”
The five drivers that actually move the multiple
If you want to work on your value, here’s where the leverage is, roughly in order of how much each one tends to matter.
Notice something about all five. Not one of them requires another dollar of revenue to fix. Every one of them requires time. That’s why this is a conversation to have years before a sale, not months. For more on the operational side of getting ready, A Quick Guide To Getting The Most Value From The Sale Of Your Business walks through it.
“The business runs without me” is the most expensive sentence you can’t say
The key-person discount is the most expensive line item that never shows up in writing.
When the business leans on you for the sales relationships, the technical calls, the day-to-day judgment, and the direction, a buyer sees it plainly. A company that loses its operating system the day the founder walks out the door is a risky thing to buy, and buyers don’t pay premium prices for risk.
The fix is real work, and simple does not mean easy:
- Build a second tier of leadership that actually makes decisions instead of just carrying out yours
- Get the knowledge out of your head and onto paper
- Hand off the customer relationships that are keyed personally to you
- Make yourself replaceable, on purpose, before a buyer does it for you at a discount
Owners who begin planning several years in advance usually walk into the room with a genuinely different business than the one they’d have sold in a hurry. That’s not a small edge. That’s often the whole ballgame.
What a formal valuation actually tells you
A lot of owners think a valuation is something you order once, right before you sell, like getting the house appraised before you list it. That sells the whole thing short.
A real baseline instead of the napkin number you’ve been carrying around.
A documented understanding of which factors are helping and which ones are hurting.
Run it again in two years. It tells you which value-creation efforts are working and which ones aren’t.
For an owner who’s a few years out, the valuation is a planning tool long before it’s a selling tool. It informs your entity decisions, your estate planning, and your gifting strategy — since moving shares while the documented value is lower can create real planning leverage. Any specific move here should be coordinated with your CPA, your attorney, and your financial planner working together.
There’s never a wrong time to do the right thing, and getting an honest read on your number is one of those things owners put off for no good reason. Know what you’ve got. Then go make it worth more.
Let’s talk
If you want to understand what your business is actually worth, and what could move that number over the next few years, that’s the conversation I have with owners through the Abundant Wealth Process.
Disclosure: This article is provided for general educational and informational purposes only and is not personalized tax, legal, accounting, or investment advice. Examples involving dollar amounts are hypothetical and illustrative only; individual results vary based on specific circumstances. Tax laws and IRS thresholds change frequently; current-year figures should be verified before reliance. Christopher Clepp, ChFC®, is a financial advisor and not a CPA or attorney; consult with qualified tax, legal, and accounting professionals regarding the application of any strategy to your specific situation. References to internal blog content are educational only and do not constitute a solicitation.
