If you own a business, there is probably one number you want to know before anything else: what is it actually worth?

The basic math is simple enough. Take normalized earnings, usually adjusted EBITDA, and multiply them by a valuation multiple. But neither number is as straightforward as it sounds. And even when you get to an enterprise value, that is not necessarily the amount you will walk away with at closing.

How Adjusted EBITDA Affects Your Business Valuation

Your tax return describes a company run to pay as little tax as legally possible. Running it that way is correct. Reading the return as a statement of what the business earns is not, and buyers want the second version.

Normalizing gets you there. You add back the costs a new owner would never inherit: the part of your salary above what the job is genuinely worth, rent you pay yourself above market on a building you own, the lawsuit you settled last year, the software implementation you will not be doing twice. All legitimate. All requiring a schedule and a general ledger reference, not an explanation over coffee.

Here is where owners lose money, and it is worth being blunt about it. Every add-back you cannot support costs you twice. You lose the adjustment. You also lose the presumption that the rest of your numbers were assembled in good faith, and from that point every remaining line is read as an argument rather than as a fact. We have watched sellers spend the last six weeks of a process defending items worth a rounding error, having burned the credibility they needed for the items that mattered.

Be conservative. An aggressive four and a half million gets tested line by line, and if any of it gives way you are back at four with your credibility already spent.

How EBITDA Multiples Affect Business Valuation

Owners arrive with a number they heard somewhere. A competitor sold at seven times. An article quoted a range. Somebody at a conference mentioned what the sector trades at.

Sector does tell a buyer something real about capital intensity, cyclicality and how actively consolidators are shopping. What it does not tell them is where your company sits inside that range, which is wider than most owners expect. Two businesses with identical earnings in the same industry can be worth strikingly different amounts, both prices entirely rational, because the buyers are pricing different levels of confidence about what those earnings look like in three years.

Contracted revenue can be forecast. Revenue rebid every year cannot. A company whose largest customer is a tenth of revenue is a different proposition from one where a single relationship is a third of it. A business with a general manager running operations is easier to own than one where the founder prices every quote personally. And growth counts only when a buyer believes it will continue.

Enterprise Value vs. What You Actually Receive at Closing

Enterprise value is what the operating business is worth before anyone accounts for the cash inside it or the debt against it. It is not your proceeds, and the gap between the two surprises people every year.

Many lower middle market transactions are structured on a cash-free, debt-free basis, which means you keep the cash on the balance sheet and pay off the debt from the price. Term loans, equipment finance, the drawn revolver, shareholder loans. All off the top.

Then working capital. The deal sets a target level of receivables, inventory and payables you have to deliver at closing. That target is typically based on normalized historical working capital, often a trailing average or another negotiated reference period. Come in below it and the price drops close to dollar for dollar, trued up a few months after closing once the final numbers are agreed on. This is also why squeezing collections in the last quarter accomplishes nothing. The reference period is long enough that a few months of aggressive collection barely moves the target. You simply arrive below it and repay the difference afterward.

Then the cost of transacting: advisory fees, lawyers, tax counsel, a sell-side quality of earnings analysis if you commission one, often an insurance policy covering the representations you made. And then tax, which turns on how the deal is structured and on your own position, and which is frequently larger than every advisory cost combined. Separately, part of the price is not lost but delayed. A slice sits in escrow for a year or more, and some may be deferred into an earnout tied to future performance.

None of this means anything has gone wrong. It means the number in the letter of intent and the number that changes your life are two different figures, and you should model the distance between them before you start rather than discover it at the end.

Business Valuation Example: Same EBITDA, Different Value

Take two businesses, each producing four million dollars of adjusted EBITDA.

The first sells at five times. Twenty million. Its work is won project by project, one customer is a third of revenue, margins have been flat for three years, and the owner touches every significant decision.

The second sells at seven. Twenty-eight million. Most of its revenue sits under multi-year agreements, no customer exceeds a tenth, margins have improved steadily, and a management team runs the place.

Eight million dollars of difference on identical earnings. Neither buyer is being generous or stingy. Each is paying for a different level of certainty, and certainty is what is actually being priced here.

How to Increase the Value of Your Business Before a Sale

A valuation is a judgment somebody forms about your company, and that judgment moves only when you hand a buyer new evidence.

The trouble is that the evidence takes time. Contracts have to be signed and then renewed at least once before they read as durable. A management hire needs enough history behind it to look permanent instead of cosmetic. Diversifying away from a dominant customer means winning new work across several sales cycles. None of it can be produced in the quarter before you go to market.

So if you want a number today, ask for a range with the reasoning attached: what the business is worth as it stands, what would move it, and how long each of those changes takes before a buyer will credit it.