Most business owners assume their company has a set value…
But it doesn’t.
And that assumption, more than almost anything else, can cost you millions when you finally decide to sell.
Here’s the truth that most advisors won’t say directly:
Your business is worth exactly what the market says it’s worth.
Not what you think it’s worth.
Not what a formula says.
And not what your accountant calculated last year.
It’s worth what a qualified buyer will pay for it…
That’s the number that matters.
But before we get there, you need to understand how professionals approach valuation.
Because if you don’t understand the framework buyers and their advisors are working from, you’ll walk into one of the most important negotiations of your life without knowing the rules of the game.
Hi! I’m Ryan Guth. I sold my first business more than a decade ago, and went into wealth management to help founder-owners like myself navigate the largest transaction of their lives. So you could call me a financial advisor or wealth manager, but with a specific focus area. I’m also a CERTIFIED FINANCIAL PLANNER™ professional (or CFP® for short) and in 2024 I published a book called Permission to Exit: Prepare to Sell Your Business Without Regret.
So let me walk you through the three approaches professionals use, and then I’ll show you what drives the number that determines your outcome.
But before I do that, let me share something I’ve noticed after speaking with hundreds of business owners over the years.
By the time most owners seriously start thinking about selling, they’re often past the most advantageous window.
Not because the business is failing, but because the conditions that make a business most valuable to a buyer don’t last forever.
Think about it like jumping off a swing at the playground…
If you jump on the way up, you land clean and move forward.
If you jump on the way down, it doesn’t go as well. When I was a kid, that meant a face full of wood chips.
Selling a business works the same way.
Buyers aren’t valuing your business based on what it’s done in the past. They’re valuing it based on what they believe it can do going forward.
They’re buying the future story of your business.
So if growth is slowing, margins are tightening, or you’re starting to mentally step back… that changes the story a buyer is willing to underwrite.
And it changes your leverage in the process.
When a business is still growing, the conversation is very different.
You have options and can be selective. You get to negotiate from a position where you don’t need the transaction.
And that tends to lead to better outcomes in valuation, deal terms, partner selection, and, ultimately, freedom in your next chapter.
Keep that in mind as we go through this. Because understanding how your business is valued is only useful if you’re thinking about timing at the same time.
So, let’s get into the 3 approaches professionals use to value a business.
Approach One: The Asset Approach
This approach values a business based on what it owns… its tangible assets, adjusted for current market value, minus liabilities.
Think of it as a liquidation value…
What would you get if you sold everything the business owns today?
This method is most used for businesses with substantial physical assets like significant inventory, equipment, and real estate.
For my clients, this isn’t the primary valuation method. But it’s worth understanding because it sets a floor, a baseline below which a deal wouldn’t makes sense.
Approach Two: The Income Approach
This is the most used category for established, profitable businesses.
The core idea is straightforward: use prior earnings to estimate what the business is worth based on its income potential.
There are four specific methods within this category, but I want to focus on the one most relevant to the kinds of businesses I work with.
It’s called the Multiple of Discretionary Earnings method. You may also hear “Multiple of EBITDA” or “profit multiple”.
And it’s particularly applicable to service-oriented businesses… contractors, accounting, healthcare, engineering, dental, and similar industries where the owner’s relationships and reputation play a meaningful role in the value of the business.
The calculation itself is simple to express:
Profit multiplied by a multiplier (often called a “multiple”), plus the tangible assets the business owns.
P times M plus stuff, if you want to put it bluntly.
But here’s where it gets interesting, and where owners could focus on the wrong variable.
Everyone fixates on the profit number. That’s understandable.
But the multiple is where the real leverage is.
That multiple is determined by marketability.
How attractive is this business to a sophisticated buyer?
How predictable and transferrable is the revenue?
How dependent is the business on the owner?
How predictable is the growth story?
How much risk is a buyer absorbing when they write the check?
Two businesses with identical profit numbers can carry very different multiples, and therefore very different valuations, based entirely on those qualitative factors.
That’s why knowing where you stand now is so valuable. We’ll talk about how you can find your current business value and multiple for free later in the video.
You can work on becoming more profitable. But wouldn’t it make more sense to learn what drives your multiple, then work on that before you’re ready to sell?
Think about this example…
Todd had a business that does $3M in annual profit. Based on the value drivers in his industry, things like client concentration, recurring revenue, owner independence, his multiple is 4. He’s got $1M in equipment and cash in the bank. So, let’s just say is business is worth $13M. That’s $3M in profit times 4x multiple, plus $1M in assets (no debt). So $13M.
We go see a few deal people (M&A advisors/investment bankers) together and they all agree that if the owner could make two great hires to get himself out of the day-to-day operations, we could fetch a 5 or even 6x multiple. So, let’s say the owner hires those two new employees to allow him step back a bit. We’re now talking a $16-19M exit because the multiple increased due to one small change based on information that the deal coordinators I work with usually give away for free!
For reference, another method worth knowing in this category is Discounted Cash Flow.
This approach projects how much money the business will generate in future years and then discounts those future dollars back to what they’re worth today.
Because a dollar you receive now is worth more than a dollar you must wait years for.
This method requires more assumptions, but it’s commonly used for businesses with strong, predictable growth trajectories.
Approach Three: The Market Approach
This approach values your business based on what comparable businesses have recently sold for.
If a similar business in your industry and size range sold at a certain multiple of earnings, that data point informs what your business might command.
The challenge is that this data is significantly harder to find for privately held small and mid-size businesses than it is for larger companies.
The market for private business sales isn’t transparent the way public stock markets are.
But experienced M&A advisors and investment bankers who work in specific industries accumulate this data over time, which is one of the most valuable things a good advisor brings to the table.
So, what does this mean for you?
Here’s the summary worth holding onto:
Three approaches. Asset, income, and market. Each has its place. And in many actual transactions, elements of more than one approach are considered.
But at the end of the day, none of these formulas determine what your business is worth. The market does.
A motivated, qualified buyer who understands your industry and believes in your growth story… that’s where your real valuation comes from.
Which brings me back to where we started.
Your business is worth what the market says it’s worth. And the market’s assessment of your business is highest when momentum is visible, growth is real, and the story a buyer needs to tell themselves (and their partners) is easy to believe.
That window doesn’t stay open forever.
If you’re doing $1 million or more in annual profit and selling is something you’re seriously considering in the next few years, the most valuable thing you can do right now isn’t to wait…
It’s to understand what your business would command today, what’s driving your multiple, and what you could do to move that number before you go to market.
It’s important to know where you stand today. I’ve developed a relationship with lots of “deal people”. We can call them investment bankers or M&A advisors–the people who will eventually help to create a competitive process for the sale of your business.
It’s my privilege to facilitate those intros and quarterback the process.
We’ll meet with several professionals who make informal business valuation a complimentary part of their prospective client process. That way you’ll have several opinions of market value and a list of value drivers that impact your multiple and how well you stack up against the competition.
You only get one shot.
There’s no second attempt at the same transaction, no rewind button once you’ve gone to market, and no recovering the years you spent building leverage you didn’t know how to use.
The owners who walk away with the best outcomes aren’t always the ones with the best businesses…
They’re the ones who knew the game before they started playing.
If you’re ready to get a clearer picture of where you stand, click the link in the description below to schedule a call.