What Is My Business Worth? Valuing a Business for Sale

Buyers of lower middle market companies most often value a business as a multiple of its adjusted EBITDA. Buyers are typically anchored to a range of multiples being appropriate for businesses of a specific profile, for example 4-6x adjusted EBITDA. Where your business is valued in relation to that range depends on your business’s growth, revenue quality, margins, customer concentration, institutionalization, management quality, as well as the buyer’s required return on investment and the competitive dynamics of the sale process. A summary of valuation methodologies is outlined below, but practically most buyers set valuation based on a combination of precedent transaction valuations, their required return and their perceived quality of your business and its risks.

Method	How it works	Who utilizes it most
Market multiples	Value equals adjusted EBITDA multiplied by a multiple drawn from precedent company sales.	Nearly all buyers consider this methodology
Leveraged buyout (LBO) analysis	The buyer calculates the price it can pay and still reach its required return based on the company’s financial projections and expected debt terms to finance the transaction.	Private equity firms, independent sponsors and search funds
Discounted cash flow (DCF)	Future cash flows are projected and discounted back to today.	Most commonly utilized by strategic acquirers, but can be a reference point for others
Asset-based value	Value is the net worth of the company’s assets.	Rarely used for profitable businesses; more common in liquidations or asset-heavy companies

The same business can receive meaningfully different offers from different buyers due to differing levels of familiarity with your type of business, assumptions regarding future performance, synergies and risks, assumptions regarding capital structure and required returns. Identifying which buyers will likely place the highest value on your company is a core part of a sell-side M&A process.

Adjusted EBITDA is the earnings before interest, taxes, depreciation and amortization, adjusted to a normalized amount that buyers should expect your business to generate under their ownership. It is the earnings figure buyers capitalize to determine the price they will pay, so every dollar of agreed adjustment adds multiple dollars to the value of your business.

EBITDA add-backs buyers commonly accept, when they are well documented:

• Owner compensation above the market rate for a comparable executive
• Personal expenses paid by the business, such as vehicles, travel or insurance
• One-time expenses, such as a lawsuit settlement and related legal fees, a system implementation or severance to employees
• Non-recurring expenses, such as professional fees related to the sale itself
• Rent paid to a related party above market rates

EBITDA add-backs are often challenged by buyers if:

• Expenses described as one-time seem to be recurring
• The adjustment lacks thorough documentation to validate the value of the adjustment
• Initiatives required to generate pro forma cost savings have not yet been actioned
• Buyers expect reductions to staff or spending to limit the business’s long term operations and revenue
• New contracts driving pro forma revenue have limited historical performance

Buyers diligence every add-back. Any adjustments that are not defensible result in lower adjusted EBITDA for the business and consequently a lower purchase price. A careful review before going to market, and in many cases an independent quality of earnings (QoE) report, puts sellers in the best position to maximize defensible adjusted EBITDA.

A valuation multiple is the number buyers apply to adjusted EBITDA to arrive at enterprise value. For example, a business with $3 million of adjusted EBITDA that illustratively sells at 6.0x would have an enterprise value of $18 million.

Multiples from recent sales of comparable companies create a reference range that buyers start with when valuing your business. Where the multiple applied to your business falls in reference to that range depends on a number of factors:

• Size. Larger businesses typically command higher multiples because they tend to be more stable, may have stronger market position and may exhibit greater economies of scale
• Growth. Growing revenue and earnings support higher future earnings, which buyers price into the company’s value
• Revenue Quality. Multi-year contracted, subscription or re-occurring revenue is valued more highly than project-based or one-time revenue. Revenue from a diversified customer base is valued more highly than from a concentrated customer group
• Margins. Higher, steadier margins and earnings support higher multiples
• Institutionalization. Businesses that run smoothly due to being systematized and having standardized, well documented processes are valued more highly because they are viewed as being more stable and better engines for potential growth
• Management Quality. Stronger management teams garner more credibility that they can deliver higher growth, which can result in higher valuation
• Buyer Competition. The number of legitimate buyers bidding against each other and the strength of their interest in buying your business meaningfully impacts the multiple your business receives
• Market conditions. Interest rates and lender appetite impact a buyer’s ability to pay

Buyers pay more for greater certainty of higher cash flows. The factors below are most likely to move an offer up or down.

Generally increases value	Generally lowers value
Steady or growing revenue and earnings	Declining or volatile financial results
Clean financial statements that tie to tax returns	Unreliable or restated financials
Defensible adjusted EBITDA	Unsupported or questionable EBITDA add-backs
Recurring or contracted revenue	Project-based or one-time revenue
Diversified customer base	Customer concentration
A leadership team that runs the business day to day	Heavy dependence on the owner
Documented processes and reliable systems	Key knowledge held by one or a few people
Clean contracts, licenses and corporate records	Legal, regulatory or contract issues
Multiple legitimate buyers competing	Negotiating bilaterally with a single buyer

The headline price is not what sellers receive at closing. A buyer’s view of debt and debtlike items and net working capital can vary from buyer to buyer. Deal structure, such as the value paid in cash at closing versus through an earnout, seller note or rollover equity, can impact the seller’s sale proceeds as much as the multiple.

Wayfinder values a business the way buyers will, so owners can make decisions with a realistic view of what the market may pay and what they would take home.

1. Understand your objectives. We discuss your goals for price, timing, your role after a sale, and your employees.
2. Review your financials. We analyze your financial statements and tax returns and determine a defensible adjusted EBITDA, including which add-backs buyers are likely to accept.
3. Assess the market. We review comparable transactions and current buyer appetite in your sector.
4. Value the business by buyer type. We estimate how strategic acquirers, private equity firms, independent sponsors, family offices and search funds are each likely to value your business.
5. Estimate your proceeds. We walk through how debt, cash, working capital, fees, taxes and deal structure affect what you would receive at closing.
6. Identify ways to increase value. We highlight what could lower value in diligence and what is worth addressing before going to market.

Our valuation is a market-based view to support decisions about a potential sale. It is not a certified appraisal for tax, estate or legal purposes.