Why Your Business Is Worth More or Less Than You Think

When business owners first hear what their company is worth in an M&A context, the reaction is almost always surprise. The gap between what an owner believes their business is worth and what the market will pay is one of the most consequential dynamics in any deal. Here's how valuation actually works.

Why doesn't my business sell for a multiple of revenue?

Because buyers pay for profit, not revenue. In middle-market M&A, businesses are valued on EBITDA — earnings before interest, taxes, depreciation, and amortization. A $10M revenue business with thin margins may be worth less than a $4M revenue business with clean books and locked-in contracts. Revenue is the headline. EBITDA is the actual offer.

What is a "multiple" and how is mine determined?

A multiple is the number applied to your EBITDA to arrive at enterprise value. A business with $1M in EBITDA at a 5x multiple is worth $5M. In the lower middle market, multiples typically range from 3x to 7x, driven by recurring revenue, customer concentration, owner dependency, growth trajectory, and quality of financials.

What is "normalized" EBITDA?

It's your reported EBITDA adjusted for expenses that won't continue under new ownership — owner salary above market, personal expenses run through the business, and one-time costs. The normalized figure is usually higher than what's on your tax return, and it's the number that drives negotiations. Documenting your add-backs clearly before going to market is one of the highest-leverage things a seller can do.

Does the type of buyer affect price?

Significantly. Strategic buyers (competitors, adjacent companies) often pay a premium because the deal creates synergies. Private equity buyers are disciplined on multiples but bring capital and growth resources — and many deals include rollover equity, letting sellers participate in the next exit. Individual buyers typically pay less but move faster.

What reduces the value that owners don't expect?

Buyers will discount for: a lease expiring within 18 months, heavy owner dependency, undocumented processes, deferred capital expenditures, and customer concentration. None are deal-killers, but all affect price, and most can be addressed with 12 to 24 months of preparation.

Know Your Number Before Someone Else Sets It For You

Masterworks Capital helps business owners understand what their company is worth in today's market and what it would take to improve that before going to market. That first conversation is free. Contact us today at 702.381.3501.