Business Valuation: Beyond the Numbers

"What's my business worth?" It's perhaps the most important question a business owner can ask—and the most commonly misunderstood. Generic answers like "4x EBITDA" or "2x revenue" hide more than they reveal. Two businesses with identical financials can be worth vastly different amounts depending on factors that don't appear on any financial statement.

This article explains how business valuation actually works, what really drives value, and how to think about your own business through a buyer's eyes. Understanding these concepts puts you in a stronger position—whether you're planning an exit in five years or just received an unsolicited offer.

The Multiple Myth

You've probably heard someone say "businesses in your industry sell for 4-6x EBITDA." This is simultaneously true and almost useless. Yes, there are average multiples by industry. But averages obscure enormous variation.

Here's the problem: that simple formula hides two critical questions that buyers spend months investigating:

1. What are the real, sustainable earnings? — Not what you reported, but what a new owner would actually earn
2. What multiple is appropriate for this specific business? — Not the industry average, but what buyers will pay for your particular risk/reward profile

A business reporting $500K profit might have "real" earnings of $700K after proper adjustments—or $350K once owner dependency is accounted for. And that 4-6x range? One business gets 3x, another gets 7x. The reasons why are what this article is about.

The Three Valuation Approaches

Professional valuers use three primary approaches, often in combination. Understanding each helps you see how buyers think about value.

Quality of Earnings: Finding the Real Number

Before applying any multiple, sophisticated buyers "normalise" your earnings. They're trying to answer: "If I bought this business tomorrow, what would it actually earn under normal operations?"

This process—called Quality of Earnings (QoE) analysis—adjusts reported profits for items that won't continue, shouldn't have been there, or need to be added back.

Common Addbacks (Increase Earnings)

In this example, reported profit of $420K becomes normalised earnings of $591K—a 41% increase. At a 4x multiple, that's the difference between $1.68M and $2.36M in business value.

What Drives the Multiple?

Here's where most business owners go wrong: they focus exclusively on increasing earnings without understanding what drives the multiple. But a business earning $500K at a 3x multiple ($1.5M) is worth less than one earning $400K at a 5x multiple ($2M).

Multiples reflect perceived risk. Lower risk = higher multiple. It's that simple. Buyers are essentially asking: "How confident am I that these earnings will continue—and grow—after I take over?"

Factors That Increase Your Multiple

Factors That Destroy Your Multiple

The Risk-Multiple Relationship

Every business sits somewhere on a risk spectrum. Where you sit determines your multiple.

Seeing Through the Buyer's Eyes

The gap between what sellers think their business is worth and what buyers will pay often comes down to perspective. Sellers see years of hard work, personal sacrifice, and emotional investment. Buyers see risk, required investment, and return on capital.

This isn't right vs wrong—it's different lenses on the same asset. But understanding the buyer's perspective helps you position your business more effectively and set realistic expectations.

How to Improve Business Value

If you're thinking about selling in the next 2-5 years, start working on value drivers now. Many of these changes take time to demonstrate results.

Key Takeaways

• Multiples are outcomes, not inputs — Your multiple is determined by your specific risk profile, not an industry average
• Normalised earnings matter more than reported — What a buyer would actually earn, not what you reported for tax purposes
• Risk drives value — Lower perceived risk = higher multiple. Focus on reducing risk factors
• Owner dependency is usually the biggest discount — If you are the business, the business isn't worth much without you
• Customer concentration kills deals — Diversify before you need to
• Buyers buy future cash flows — History matters only as evidence of what's likely to continue
• Start early — Most value-building initiatives take 2-3 years to show results

Understanding valuation isn't just about getting the best price when you sell. It's about running a better business—one that's more resilient, less dependent on you, and genuinely valuable as an asset.