How Much Is My Business Worth?

If you own a business with under $5 million in revenue, its value comes down to three questions a buyer asks: how much does it reliably earn, how risky are those earnings, and how will the purchase be paid for? This guide walks through each one in plain English.

The short answer

Most buyers of established private companies start from a simple formula: sustainable annual earnings multiplied by a multiple. The multiple reflects how confident the buyer is that those earnings will continue. Debt, cash, working capital, and the terms of the deal then determine what you actually take home.

Every part of that formula can be argued, which is why two buyers can look at the same business and arrive at very different numbers.

Step 1: Find the right earnings figure

Buyers of smaller businesses usually measure earnings in one of two ways.

• Seller’s discretionary earnings (SDE) is pre-tax profit plus the owner’s salary and benefits, interest, depreciation, amortization, and one-time or personal expenses. It shows what the business earns for a single owner-operator, and it is common for smaller, owner-run companies.
• EBITDA (earnings before interest, taxes, depreciation, and amortization) assumes the business pays a market salary to whoever runs it. It is the standard for businesses with a management team beyond the owner, and it is the figure most institutional and long-term buyers, including Mondsegel, focus on.

The same company will show a higher SDE than EBITDA, so make sure you know which figure a buyer is quoting before comparing offers.

Step 2: Normalize the numbers

Private company books are built to minimize taxes, not to show a buyer what the business earns. Normalizing, sometimes called recasting, adjusts reported profit to reflect ongoing economics. Typical adjustments include:

• An owner salary that is above or below what it would cost to hire a manager.
• Personal expenses run through the company, such as vehicles, travel, or insurance.
• One-time costs: a lawsuit, a relocation, a major repair that will not recur.
• Family members on payroll whose roles would not continue, or would need to be replaced at market pay.
• Rent paid to an owner-controlled entity at a rate above or below market.

Every add-back will be tested in diligence. Keep the receipts, invoices, and reasoning behind each one. Well-documented adjustments hold up; vague ones become negotiating points.

Step 3: Understand what moves the multiple

The multiple is a buyer’s judgment about risk and durability. Two businesses with identical earnings can be valued very differently. The factors that matter most:

• Customer concentration. If one customer is a large share of revenue, losing it would change everything. Buyers discount for that risk.
• Owner dependence. If customers, suppliers, or key decisions run through you personally, the business is harder to transfer. A capable second layer of management is one of the strongest value drivers in a smaller company.
• Revenue quality. Contracts, repeat customers, and recurring orders are worth more than one-off project work.
• Trend. Steady or rising revenue and margins over three to five years support a higher multiple than a single strong year.
• Equipment and facilities. Deferred maintenance or an aging fleet means future capital spending, which a buyer will subtract.
• Financial records. Accrual-based, reviewed or audited statements reduce uncertainty. Messy books increase it.
• Industry and cyclicality. Businesses tied to volatile commodities or a single end market carry more risk than diversified ones.

Step 4: From enterprise value to what you keep

Earnings times the multiple gives an enterprise value. Several items stand between that number and your proceeds:

• Debt and cash. Most deals are priced cash-free and debt-free: you keep the cash and pay off the debt at closing.
• Working capital. Buyers expect a normal level of receivables, inventory, and payables to stay in the business. The agreed target, often called a peg, can move the final price up or down.
• Transaction costs. Legal, accounting, and any broker fees.
• Taxes. Whether the deal is structured as an asset sale or a stock sale can change your after-tax proceeds significantly. Talk to your CPA and attorney early.

Step 5: Price is only half of an offer

How the price is paid matters as much as the number itself. Common components include cash at closing, a seller note paid over time, an earnout tied to future performance, and equity you roll into the new ownership. A higher headline price that depends heavily on an earnout may be worth less than a lower, mostly-cash offer.

Ask every buyer the same questions: How much is paid at closing? What is contingent? How is the deal financed? Have you ever lowered a price after signing a letter of intent?

Asking price versus closing price

A listing price is a starting point, not a value. The price that matters is the one that survives diligence and closes. Some buyers offer high to win exclusivity, then reduce the price during diligence, a practice called re-trading. At Mondsegel, when appropriate, we may outline proposed valuation, transaction structure, and key terms in a letter of intent. The proposed transaction remains subject to due diligence, applicable approvals, available financing where needed, and definitive agreements. Any provisions intended to be legally binding will be identified in the applicable written agreement.

Getting a reliable number

• A broker’s opinion of value is a quick, market-based estimate, usually free if you are considering listing.
• A formal valuation from a credentialed appraiser is useful for estate planning, partner buyouts, or disputes.
• Your CPA can help normalize earnings and estimate after-tax proceeds under different structures.
• A confidential conversation with a buyer tells you how the market actually sees your business, without obligation.

This page is general information, not tax, legal, or valuation advice. Every business and transaction is different; consult your own advisors.