Lesson 3 of 11 ยท 4 min read
Level 2: What Is My Company Worth?
Understanding how buyers determine value, the role of EBITDA multiples, and what drives higher or lower valuations.
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One of the first questions most owners ask when they begin thinking about a sale is simple: what is my company worth?
It is an important question, but it is also one that can be misunderstood early in the process. Many owners naturally start with what they believe the business should be worth based on the years of work, risk, and sacrifice it took to build it. That perspective matters. It reflects the personal value of what you created. In a transaction, however, market value is usually determined differently.
Your company is worth what a qualified buyer is willing to pay based on the performance of the business, the level of risk they see, the future opportunity they believe exists, and the structure of the deal.
That does not mean valuation is random. It means valuation is shaped by financial performance, market context, buyer demand, deal structure, and confidence in the story behind the business. Two companies with similar revenue can receive very different valuations if one appears easier to transition, easier to understand, and lower risk.
This is why valuation is not just about math. It is also about preparation and positioning.
Core valuation ideas sellers should understand
| Term | Simple meaning | Why it matters in a sale process |
|---|---|---|
| Revenue | Top line sales generated by the business | Revenue shows size and market traction, but it does not tell the full story on profitability. |
| EBITDA | Earnings before interest, taxes, depreciation, and amortization | EBITDA is commonly used as a measure of operating performance and often becomes a core valuation reference point. |
| Cash Flow | The cash the business produces or can distribute over time | Buyers care about whether the business converts performance into real cash generation. |
| Equity Value | Assets minus liabilities, adjusted for deal structure | This helps sellers understand what value may actually remain after debt and other obligations are considered. |
A helpful way to think about valuation is to remember that buyers do not purchase the past by itself. They purchase the future cash flow, strategic value, and transferability of the company they believe they are acquiring.
For that reason, valuation discussions usually move quickly from revenue into EBITDA, cash flow, margin quality, customer concentration, management depth, recurring revenue, and transition risk.
What usually increases or decreases value
| Category | Usually supports stronger value | Usually puts pressure on value |
|---|---|---|
| Financial profile | Consistent earnings, improving margins, clean financial statements | Volatile results, unclear add-backs, weak reporting |
| Customer base | Diversified customers, recurring relationships, strong retention | Heavy concentration in one customer or unstable demand |
| Operations | Documented processes, low disruption risk, repeatable workflow | Owner-dependent operations or inconsistent systems |
| Management | Capable leadership beyond the founder | Business relies too heavily on one person |
| Growth story | Clear expansion path and evidence of opportunity | No articulated strategy or declining market position |
Common valuation methods
| Method | What it looks at | When sellers may hear it used |
|---|---|---|
| Discounted Cash Flow | Forecasted future cash flow discounted back to present value | Often discussed when future performance is a large part of the investment case. |
| Asset-based valuation | Net asset value after liabilities | More common when assets drive value or earnings do not tell the full story. |
| Comparable company analysis | Valuation multiples from similar businesses | Useful when the market has enough comparable data to benchmark against. |
| Precedent transactions | Multiples and terms from prior deals | Helpful for understanding how buyers have priced similar businesses in real transactions. |
No single method tells the whole story. Most credible valuation conversations use more than one lens and then pressure test the results against what the market is likely to support.
This is also where trusted advisors matter. Sellers should be careful of bad actors who quickly throw out a high number to win engagement or a low number to gain exclusivity and control the process. A trustworthy broker or advisor should be able to explain the logic behind a valuation view, the assumptions being made, and the risks that could change the outcome.
Understanding add-backs
Many privately owned businesses include expenses or income items that do not reflect the true ongoing earning power of the company. Buyers and advisors often adjust for these items to understand normalized performance.
Add-backs can be appropriate, but they should be credible, supportable, and easy to explain. The more aggressive the adjustment, the more likely it is to be challenged.
| Example | Why it may be adjusted | What sellers should be ready to show |
|---|---|---|
| Owner compensation | An owner may pay themselves above or below market compared with a replacement hire. | Compensation records and a reasonable explanation of market-level replacement cost. |
| One-time expenses | A non-recurring legal bill, relocation cost, or unusual repair may not continue after close. | Invoices, timing context, and why the cost is truly non-recurring. |
| One-time revenue | A one-off contract or unusual project may overstate normalized earnings. | Clear separation of repeatable revenue from exceptional items. |
| Personal or discretionary items | Certain expenses may be run through the business but are not part of normal operations. | Documentation and judgment. Weak or excessive adjustments reduce credibility. |
Level 2 takeaway
You do not need to become a valuation expert, but you do need to understand the language, the major methods, and the factors that shape what a buyer may be willing to pay. Strong preparation helps sellers enter valuation conversations with more clarity, more credibility, and fewer surprises.