When I first started thinking about selling my small consulting firm three years ago, I had absolutely no idea what it was actually worth. I mean, I knew what I had put into it emotionally and financially, but translating that into a dollar figure? That was an entirely different beast. It turns out I am not alone in this confusion. Most business owners walk around with a vague notion of their company’s value, often wildly off the mark in one direction or another.  Learn practical valuation methods, common mistakes, and expert insights from real experience in determining business value.​​​​​​​​​​​​​​​​

Business valuation is one of those topics that sounds incredibly dry until you actually need it. Then it becomes the most fascinating and nerve-wracking thing in the world. Whether you are preparing to sell, bringing in investors, going through a divorce, or just curious about what you have built, knowing how to properly value a business is absolutely essential.

The funny thing about business valuation is that it is both an art and a science. You would think with all our modern technology and sophisticated financial models that we could just plug some numbers into a calculator and get a definitive answer. But the reality is much messier and, honestly, much more interesting.

Let me share what I learned through my own experience and through countless conversations with other business owners who have been through this process. The first thing that surprised me was discovering that there is not just one way to value a business. There are actually several different approaches, and depending on your industry, size, and situation, different methods might be more appropriate.

The most common approach that people encounter is the income-based method. This essentially looks at how much money your business generates and projects that into the future. When my accountant first walked me through this, she used a multiple of earnings before interest, taxes, depreciation, and amortization. Try saying that five times fast. Most people just call it EBITDA, thankfully. The idea is relatively straightforward: take your EBITDA and multiply it by a number that reflects your industry and risk profile. A stable, established business in a boring industry might get a multiple of four or five. A high-growth tech company could command multiples of ten or even higher.

But here is where it gets tricky. What multiple should you actually use? I spent weeks researching comparable sales in my industry, talking to brokers, and trying to figure out if my business deserved a three or a five multiple. That range represented hundreds of thousands of dollars in difference. The reality is that the multiple depends on dozens of factors including your growth rate, customer concentration, market conditions, and even how replaceable you are as the owner.

Speaking of being replaceable, that was a tough pill to swallow. One of the biggest factors that affect business valuation is how dependent the company is on its owner. I had always prided myself on being hands-on and in essential to every aspect of my business. Turns out, that actually hurts the value. Buyers want businesses that can run without the founder hovering over every decision. I had to do some serious work documenting processes and training my team before my business became truly valuable to an outside buyer.

The asset-based approach is another valuation method, though it is less common for most operating businesses. This method basically adds up everything you own and subtracts what you owe. It works well for real estate companies or businesses with significant physical assets, but for service businesses like mine, it often undervalues the company because it ignores the earning potential and intangible assets like customer relationships and brand reputation.

Then there is the market-based approach, which compares your business to similar businesses that have recently sold. This sounds great in theory, but finding truly comparable businesses is harder than you might think. Every business has unique characteristics, and the circumstances of each sale can vary dramatically. Still, looking at market comparables gives you a reality check and helps you understand what buyers are actually willing to pay in the current environmen.​​​​​​​​​​​​​​​​

Reference

Koller, T., Goedhart, M., & Wessels, D. (Year). Valuation: Measuring and managing the value of companies (edition). John Wiley & Sons.

Hladika, M., Valenta, I., & Vidovic, D. (2020). Modern methods of business valuation—Case study and new concepts. Sustainability, 12(7), 2699. https://doi.org/10.3390/su12072699 https://doi.org/10.3390/su12072699

Guseynov, F., & Huseynova, A. (2020). Introduction to business valuation. In Valuation challenges and solutions in contemporary businesses (pp. 1–28). IGI Global. https://doi.org/10.4018/978-1-7998-3126-0 https://doi.org/10.4018/978-1-7998-3126-0