What Is Your Business Actually Worth? Why Owner Estimates Run 30% High

The number in your head is probably too high. Not because you built something bad, but because the way owners think about value and the way buyers calculate it are two completely different exercises. In my work with business owners approaching a transition, a 20-to-30 percent miss is common. For a business an owner believes is worth $4 million, that gap is real money left on the table or a retirement plan that quietly doesn't work.

The Number Starts With Earnings, Not Revenue

Buyers don't pay for revenue. They pay for a multiple of normalized earnings, and the normalization step is where owner estimates first go wrong.

The two most common measures are EBITDA (earnings before interest, taxes, depreciation, and amortization) and seller's discretionary earnings (SDE), which adds the owner's compensation and personal expenses back into the profit figure. SDE is typical for smaller businesses where the owner is the operator; EBITDA is more common above roughly $2 million in annual profit.

Normalization removes one-time expenses, personal perks, and owner compensation that a hired replacement wouldn't cost. Buyers scrutinize every add-back, and what an owner calls a legitimate adjustment a buyer may simply reject.

Once normalized earnings are set, a multiple is applied. A $500,000 SDE service business might trade at 3x. A $3 million EBITDA software business with recurring revenue might command 7x or higher. Smaller businesses carry more perceived risk, so they get lower multiples even within the same industry.

Where Value Gets Discounted

Two factors cut the multiple faster than almost anything else, and both are within an owner's control years before a sale.

Owner-dependence. If key relationships and operational decisions run through one person, a buyer is purchasing a job, not a company. If the answer to "what happens after the earnout ends?" is unclear, the multiple comes down.

Customer concentration. A buyer's bank will often flag any single customer representing more than 15-to-20 percent of revenue. If your top customer is 40 percent of revenue, expect either a meaningful price reduction or deal structure that shifts risk back to you through earnouts or escrow holdbacks.

Fixing either takes time, which is why the planning conversation belongs two to four years before a sale, not two to four months before.

The Takeaway

The single fact that most changes the answer: how long you have before you want to exit. Owners who start early can actually move the number. Owners who start late are negotiating with a buyer who already knows what they found.

What goes wrong for owners who do everything right is underestimating how long it takes for operational changes or a diversified customer base to show up credibly in trailing financials. Buyers price what they can verify, not what you are in the process of building.

This sits squarely in the Soil layer of a well-built plan at Sporos: the business is often the largest single asset, and what it nets after taxes determines everything that follows.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Consult with qualified professionals for guidance specific to your situation.