By Rod Johnston, MBA, CMA
Last week I walked through the five myths I hear most often from owners about what their business is worth. If you read that and recognized yourself in one or two of them, good. That’s the starting point, not a problem. This week, what actually goes into a real number, and what to do with it once you have one.
A real valuation isn’t a formula you plug your revenue into. It’s a look at your specific business through a handful of lenses:
Normalized cash flow, not top-line revenue. What matters is what the business actually generates once you strip out owner perks, one-time expenses, and anything that wouldn’t carry forward to a new owner. Two businesses with the same revenue can have very different cash flow, and cash flow is what buyers pay for.
How much of the business depends on you. A business that runs well whether or not the owner shows up is worth more than one that stops the moment the owner leaves. If your customers only trust you, your suppliers only deal with you, and your team can’t make a decision without you, that’s a real number pulling your value down, and it’s fixable before you sell, not after.
Where the revenue is coming from, and how steady it is. Recurring contracts and long-tenured customers are worth more than one-off jobs, even at the same total revenue. Concentration matters too. A business where one customer is 40% of revenue carries more risk, and buyers price risk in.
The trend line, not just the snapshot. A business trending up tells a different story than one that’s flat or declining, even if this year’s numbers happen to match. Buyers are paying for where the business is headed, not just where it’s been.
What’s actually happened in your market, not a rule of thumb. Real comparable transactions, adjusted for your specific size, industry, and circumstances, tell you far more than “businesses like mine sell for X.”
None of this is something an online calculator or a back-of-napkin multiple can capture. It takes someone who values businesses like yours for a living, working from your actual financials.
So here’s what to do next. Get your financials in order, ideally the last three years, cleaned up and easy to hand over. Resist the urge to guess or to anchor on a number you heard somewhere. And get a real valuation done by someone who does this for a living, not as a one-time exercise before a sale, but as a planning tool you can revisit as your business changes.
Owners who do this early don’t just walk into a sale with a stronger number. They walk in with the confidence that comes from knowing, instead of hoping.
High Mark’s expert advisors are always available for a complimentary consultation on planning for the sale of your business and what life could be after your sale. Call or e-mail us anytime to schedule a consultation. You can reach us at info@hmexit.com.