How much is my business worth?

That sentence contains three things most owners get wrong on the first attempt: the input is earnings and not sales, the earnings figure is adjusted rather than the one on the tax return, and the multiple is not a constant. This guide works through each of them in the order a buyer would.

One thing to be clear about before we start. Ascension CFO is not a firm of certified business appraisers, and nothing here is a valuation of your company. What follows is the arithmetic buyers use, so that you can build a defensible internal number and know which parts of it you can still change. When the figure has to survive a real transaction, a dispute or the IRS, it needs a credentialed appraiser, and we will tell you when you have reached that point.

The formula every buyer starts with

Underneath the jargon, almost every private business sale reduces to the same three steps.

1. Establish adjusted earnings. Recast the profit and loss statement so it shows what the business earns for its owner, stripped of financing decisions, accounting conventions and personal spending.
2. Apply a multiple. The multiple is a price on risk. Predictable, transferable earnings earn a higher one.
3. Adjust for the balance sheet. Most deals are done on a cash-free, debt-free basis, so interest-bearing debt comes off and a normal level of working capital is expected to be left in the business.

Adjusted earnings multiplied by the multiple gives enterprise value. Enterprise value minus debt gives what the equity is worth. What lands in your account after fees, escrow and tax is a further step down again, and we come back to that at the end because it is the number that actually matters to you.

Step one: your earnings are not the number on your tax return

The profit shown on a small business tax return is usually a poor description of what the business earns, and deliberately so. It carries the owner's compensation, which a new owner would set differently. It carries interest on debt the buyer will not inherit. It carries depreciation schedules chosen for tax reasons. It often carries a vehicle, a phone, some travel and a family member on payroll.

Recasting undoes all of that. Depending on your size, the recast figure is called one of two things.

• Seller's discretionary earnings (SDE) adds the owner's full compensation and benefits back in. It describes the total financial benefit available to one working owner, and it is the standard measure for businesses where the owner works in the business day to day.
• EBITDA leaves a market-rate salary in place for whoever does the owner's job. It describes what the business earns after paying for management, and it is the standard measure once a company is large enough to have a real management team.

These two figures are never equal, and the multiples that go with them are different too. Applying an SDE multiple to an EBITDA number, or the reverse, is the single most common way owners arrive at a valuation that is out by a factor of two. We have written the comparison out in full in SDE vs EBITDA and which number your buyer will use, including which add-backs survive diligence and which get struck out.

Step two: the multiple is a scorecard, not a constant

Two businesses with identical adjusted earnings routinely sell for very different prices, because the multiple prices the risk that those earnings do not continue after the owner leaves. Broadly, the factors below are what move it.

Notice how many of those are financial management problems rather than sales problems. That is the useful part of this exercise. Revenue growth is hard and slow. Removing a customer concentration risk, cleaning up three years of records, building a forecast that holds, and documenting the decisions that currently run through you are all achievable inside a normal planning horizon, and each of them argues for a higher multiple on the same earnings.

What a rule of thumb is good for, and what it is not

Most industries carry a shorthand: a percentage of annual revenue plus inventory, a dollar figure per account, a multiple of monthly billings. Brokers use them constantly, and they exist because they are quick.

Use one as a sanity check. If your earnings-based estimate lands wildly outside the rule of thumb for your trade, something in the recast is probably wrong and it is worth finding out what before anyone else does.

Do not use one as a decision. A rule of thumb is an average across every business in a category, which means it deliberately ignores margin, growth, concentration and owner dependency. Those are precisely the variables that separate the top quartile of a category from the bottom, and precisely the variables you can still change. An owner who accepts the rule of thumb has accepted the average outcome before doing any of the work that beats it.

Why a business with $1 million in sales has no single answer

This is the most-searched version of the question, and it does not have an answer as asked, because revenue tells a buyer almost nothing.

Consider two hypothetical companies, each turning over $1 million a year. The first is a service business run by an owner who takes a modest salary, clears about $250,000 in adjusted earnings, has forty active clients and a team that handles delivery without them. The second turns over the same $1 million, clears about $80,000 after the owner is paid properly, and earns two-thirds of that from a single client on a handshake.

The first might be discussed at three times earnings and change hands somewhere around $750,000. The second is a harder conversation at any multiple, because a buyer is not purchasing $1 million of revenue, they are purchasing $80,000 of profit that could halve with one phone call. Same revenue, entirely different businesses.

Which is why the honest first step is never "what is my revenue worth" but "what does this business actually earn, and how much of that survives me leaving".

Why the online calculators give you a number you cannot use

Free valuation calculators dominate the search results for this question, and they are not useless: they will show you the shape of the arithmetic in about ninety seconds. Their limits are worth knowing before you rely on one.

They take your earnings figure on trust, so if you enter unrecast profit the output is wrong before the calculation starts. They apply a generic industry multiple rather than one that reflects your concentration, growth or owner dependency. They ignore the balance sheet entirely, so debt and working capital never appear. And most of them are attached to a business that would like to sell you something, which is a reason to check the assumptions rather than a reason to distrust the tool.

Treat a calculator as a first bracket. Treat a recast profit and loss statement, built with someone who has seen how buyers read one, as the actual estimate.

The price is not the proceeds

Owners plan around the headline number and are then surprised by what reaches them. Between enterprise value and your bank account sit several deductions, and they are large enough to change decisions.

• Interest-bearing debt is repaid at closing. Bank loans, equipment finance and shareholder loans all come off.
• A working capital target is normally agreed, and you are expected to leave a normal level of receivables and inventory behind. Falling short of the target reduces the price at settlement.
• Deferred consideration. A portion of the price is often held back in escrow or paid as an earn-out contingent on future performance, which means part of the number is a forecast rather than a payment.
• Transaction costs. Broker or banker fees, legal work and accounting support all land on the seller's side.
• Tax, which is driven as much by the structure of the deal as by the size of it. Deal structure can move the after-tax result more than several months of negotiation on price.

The practical consequence is that "what is my business worth" and "what will I walk away with" are two different questions, and only the second one funds your retirement. Both belong in the plan. What each item on an exit plan should contain is set out in our guide to what an exit plan should include.

What to do with the number once you have it

An estimate is only useful next to a second figure: what the sale has to produce for you personally, after debt and after tax, to fund whatever comes next. The gap between those two numbers is the entire content of an exit plan.

If the gap is small, the work is mostly tidying and timing. If the gap is large and you have three to five years, it is a value-building program with specific financial targets attached, and it is very achievable. If the gap is large and you intend to sell next year, the realistic answer is a later date rather than a more optimistic spreadsheet. The reasoning behind that runway, and what it costs to ignore it, is covered in the 3 to 5 year rule and in what waiting to sell actually costs.

Most owners have never had both numbers on the same page. Putting them there is usually the most clarifying hour of the whole process, and it changes what you work on the following Monday.

Where a fractional CFO fits

An appraiser tells you what the business is worth today. A broker or banker finds a buyer when you are ready. Between those two sits the work that determines the number in the first place: recasting the earnings correctly, closing the concentration and dependency risks a buyer would price against you, getting three years of records into a state that survives diligence, and running a forecast that makes the trajectory credible rather than asserted.

That is the part we do, and it is the part with the longest lead time. The specific work that moves a multiple is set out in increasing business value before an exit, and the ongoing engagement is described under exit planning.

Hourly consulting is billed at $250 per hour, and ongoing advisory work runs on monthly plans priced to the needs of the business. If you want a second opinion on your own number, the first conversation is a free thirty-minute call and you can book it on our calendar. Bring your last three years of profit and loss statements.