How to Value a Business for Sale

Ask an owner what their business is worth and you'll usually get a multiple. Six times earnings, because that's the number the guy who sold last year got. Ask a buyer the same question and you get something different. They rebuild your earnings into a figure you've probably never calculated, and the multiple comes second, defended line by line. That gap, between the number you carry around and the number a buyer constructs, is where most owners misjudge what they're holding.

A sale price isn't pulled from the air. It's an argument with two moving parts you fight over, the earnings and the multiple, plus a stack of adjustments that quietly separate the headline from the money that reaches your account. Learn how the number really gets built and you're negotiating from knowledge instead of a rule of thumb you half-remember.

The Basic Equation

Most mid-sized businesses get valued the same way. Take a measure of earnings, multiply by a number. The earnings figure is usually EBITDA, which is just the cash the business throws off before you get into how it's financed and how the accountant handled depreciation. The multiple is how many years of that earnings a buyer will pay for up front, and it stands in for how good, and how safe, they think the business is.

Both sides of that equation are arguments, not facts. You can define the earnings generously or conservatively. You can push the multiple around on comparable deals, on the kind of buyer at the table, on the specific risks in your shop. Two smart, honest people can look at the same company and land a mile apart, just by disagreeing on those two inputs. Which is why the equation only gets you to the starting line.