What Your Business Is Actually Worth

Most owners carry a number in their head, and it is usually wrong in a predictable direction — a competitor’s reported sale, a multiple mentioned at a conference, a calculation done once on earnings a buyer will not accept. That is an information problem, not a negotiation problem, and it is fixable.

Valuation estimates what a willing buyer would pay a willing seller — a statement about a market, not a property of the business. The same company is worth different amounts to a competitor, a private equity fund, your management team, and your children, because each buys something different.

Owners value the business at replacement cost of effort — thirty years of work has to be worth something — while buyers value the risk-adjusted cash flow it produces without you. Owners think in headline price, buyers in structure; a large earnout and a long escrow make an offer smaller than the same number in cash.

Owners also compare themselves to companies that had characteristics theirs does not, and that gap does the most damage. The seller who got the strong multiple had reviewed financials going back years, no customer above a modest share of revenue, a president who was not the founder, mostly cash at close. Those characteristics are the multiple.

They are not competing opinions — each measures something different, and which governs depends on the business and the purpose.

A professional runs more than one and reconciles them, weighting whichever best reflects how a buyer for this business would think — judgment, which is why two credentialed appraisers can honestly differ on the same company.

Nearly every middle-market deal is priced off a multiple of adjusted EBITDA, which makes its definition the most consequential number in the transaction. A change to it moves price by itself times the multiple, so the add-back conversation is where deals quietly get re-priced.

The add-backs that survive are boring and documented: owner compensation above a hired executive’s cost, a genuinely one-time legal settlement, above-market rent to an entity you own. The ones that fail ask the buyer to accept a story, and a buyer’s accountant is paid to be unpersuaded.

Document add-backs as they occur rather than reconstructing them later. An owner who has run personal expenses through the company for a decade without segregating them spends diligence proving which charges were which — and every unprovable dollar is earnings multiplied out of the price.

Multiples are shorthand for risk. Everything below is a statement about how certain the future cash flow is.

• Recurring and contracted revenue. Revenue that renews without being re-won beats revenue sold again every year — contracts, subscriptions, real switching costs.
• Customer concentration. The most reliable multiple suppressant in the middle market — it makes the investment a bet on one relationship that depended on you.
• Management depth. A team that decides without the owner and intends to stay. It moves price and structure both — all cash, versus three years of you staying on.
• Growth rate and its quality. Only growth a buyer believes will continue raises the multiple. A tailwind, an unseasoned contract, or one salesperson’s relationships get discounted.
• Industry and the capital chasing it. Multiples partly track how much acquisition capital is aimed at your sector — the driver you cannot influence, and an argument for flexible timing.
• Margin and capital intensity. Two companies with the same EBITDA differ if one reinvests most of it to stand still. Buyers increasingly price free cash flow.
• How much of the business is you. Your relationships, your judgment, your name on the door — owner dependence hits the discount rate, the multiple, and the structure at once.

A strategic buyer is an operating company — a competitor, supplier, or customer — buying your business to do something with it. They can pay above the standalone numbers because they are buying synergy: your customers sold their products, your overhead eliminated. The premium has a cost — strategics are the most likely to consolidate operations, relocate functions, and let go of people you know.

A financial buyer — a private equity fund, a family office, an independent sponsor — buys cash flow with a plan to sell it again. They usually cannot pay a synergy premium, but they want management to stay, they close reliably, and they often let the owner keep a piece of the next sale. They bring debt, governance, and a holding period — the culture question deferred, not answered.

Neither is better — different transactions, compared on price, structure, and what happens to the thing you built. Three Exit Paths works through it, and Deal Structure and Tax covers why identical headline numbers produce different after-tax outcomes.

Main Street Alternatives is not a valuation firm. We do not issue appraisals, we do not opine on fair market value for gift or estate purposes, and when a defensible number is needed — for a gift, an ESOP, a buy-sell trigger, or a dispute — that work belongs to a credentialed business appraiser. Using an adviser’s informal estimate where a formal appraisal is required is a good way to invite a challenge you will lose.

What we do is work on the other side of the valuation: helping you understand which drivers are moving your number, modeling what a given offer produces after tax and after structure, and building the plan for the proceeds. An owner comparing two offers usually needs someone to translate them into net dollars arriving on specific dates under specific conditions — because that, not the headline, is what funds the rest of your life.

The most useful thing a valuation gives you is not the number — it is the ranked list of reasons the number is not higher. Every item is either something you can still change or something to expect in the negotiation. Treated as a scorecard it teaches nothing; treated as a diagnostic it is the highest-return project available to you.