You've spent 20 years building something real. When you finally ask a banker or accountant what it's worth, they'll give you a multiple. "Four to six times EBITDA" — said with the confidence of a man who has never signed the front of a paycheck. That number isn't wrong. But it's only the beginning of a calculation that most owners never see the rest of.
Buyers aren't guessing. They have a model. They know exactly what they're willing to pay before they walk in the door. And if you don't understand that model, you're negotiating blind.
The Number Buyers Actually Start With Isn't Your Revenue
Buyers start with EBITDA — earnings before interest, taxes, depreciation, and amortization. Strip out the noise, find the true operating profit. But here's what your accountant probably didn't tell you: the EBITDA they use isn't the number on your tax return.
Strategic buyers and private equity firms both run what's called a "quality of earnings" analysis. They recast your financials. They add back one-time expenses, owner perks, above-market owner compensation, and non-recurring costs. That adjusted number — normalized EBITDA — is what they multiply. A business showing $800K in tax-return profit can legitimately present $1.4M in normalized EBITDA once the recast is done properly. That difference, at a 5x multiple, is $3 million in your pocket.
Most owners never do this work before they go to market. They leave that value on the table because they didn't know the table existed.
Multiples Are Not Fixed. They're Negotiated — Before You Even Know It.
The multiple a buyer applies isn't pulled from a database. It's a function of perceived risk. The lower their confidence in your future cash flow, the lower the multiple. Every question they ask in diligence is really the same question: how sure am I that this profit continues without you?
Customer concentration is the fastest way to destroy your multiple. One customer representing 30% or more of revenue terrifies a buyer. They discount immediately. One lost contract and their investment thesis collapses. If you have concentration risk and you're five years from an exit, fixing it now is worth more per dollar spent than any marketing campaign you'll ever run.
Owner dependency is the second killer. If the relationships, the expertise, or the decision-making lives in your head and nowhere else, the buyer isn't buying a business — they're buying a job. A job they'll need to replace you to do. That's not a 5x story. That's a 3x story, with an earnout that keeps you working for three more years.
What a Smart Buyer's Offer Actually Looks Like
A letter of intent from a sophisticated buyer will contain four numbers, not one. Miss this and you'll misread the offer entirely.
The first is the enterprise value — the headline number everyone focuses on. The second is the equity value, which is enterprise value minus assumed debt and working capital adjustments. The third is the cash at close, which in many deals involving earnouts or rollovers is significantly less than the enterprise value. The fourth is contingent consideration — earnouts, seller notes, or equity rollovers — which you may or may not ever collect in full.
A $10 million offer that's $6 million at close, $2 million in an earnout tied to two years of performance targets, and $2 million in seller financing isn't a $10 million deal. It's a $6 million deal with $4 million of maybes. Sellers who don't understand this structure end up negotiating the wrong number. They fight for a higher headline and concede on structure. That's the wrong trade.
Working Capital: The $500,000 Surprise No One Warned You About
There is a line in nearly every purchase agreement called the working capital peg. Buyers establish a target — the amount of current assets minus current liabilities they expect to be in the business at close. If you show up to closing with less than that target, they deduct the shortfall from your check.
This is not theoretical. It happens in the majority of deals. Owners who spend the six months before closing harvesting receivables, running inventory lean, or pulling cash distributions end up writing a check at the closing table — or having it written for them. One client in our experience lost $480,000 on closing day to a working capital adjustment they didn't see coming because no one had explained the peg to them during negotiation.
Know what your normalized working capital is before you sign a letter of intent. Fight for a fair peg during the LOI stage, not during diligence when you have no leverage.
The Buyer Who Pays the Most Isn't Always Who You Think
Private equity gets all the attention. But for companies in the $5M–$20M revenue range, a strategic buyer — a larger competitor, a supplier moving downstream, a customer moving upstream — will often pay more. Why? Because they're not buying your EBITDA. They're buying what your EBITDA becomes inside their platform.
If your $1.2M EBITDA drops to their bottom line with near-zero integration cost, and they apply their own 8x multiple to it, they can pay you 6x and still create value for themselves. That math only works for a strategic buyer. PE needs a return on invested capital. Strategics need a return on strategic logic. Those are different calculations — and the strategic one often produces a higher check.
Running a real process — even a quiet one — with three to five potential buyers simultaneously is what creates leverage. One buyer is a negotiation. Five buyers is an auction. The difference in final price can be 20–40%.
The Question Behind Every Valuation Conversation
Every buyer, regardless of type, is ultimately answering one question: what is the probability that this business performs as represented, without the current owner, for the next five years?
Your job, before you go to market, is to systematically raise that probability in their mind. Document your processes. Build your management team. Diversify your customers. Clean your financials. Create the paper trail that lets a buyer say yes with confidence.
The businesses that command top-of-range multiples aren't just profitable. They're provably profitable. There's a difference. One requires a buyer to trust you. The other gives them no choice but to.
Bottom Line
Valuation isn't a number someone gives you. It's an argument you build — with evidence, structure, and timing. The owners who walk away with the highest price didn't get lucky. They understood how buyers think, prepared accordingly, and ran a process designed to create competition.
You built something real. Make sure the process you use to sell it is as serious as the work you did to build it.
If you want to understand exactly what your business would look like through a buyer's eyes — and where the gaps are — let's talk. No pitch. Just clarity.
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