What is a Business Worth?

I’ve spent over 15 years immersed in the world of business valuations—probably more time than any sane person should. With a PhD in accounting and a dissertation (plus a good chunk of my research) dedicated to valuations, it’s safe to say I’ve geeked out on this topic more than most. So when a business owner asks me, “What’s my business worth?” I get genuinely excited—it’s like asking a chef about their favorite dish!

In this post, I’m going to give you the correct answer to this big question (most articles/videos on the topic don’t). Then, I’ll break it down into a simple rule of thumb you can use for a quick ballpark estimate. Let’s get to it!

The Correct Answer

When it comes to figuring out what a business is worth, the answer boils down to this: the present value of its expected future cash flows. But what does that mean, exactly? Let’s break it down into three key parts: cash flow, future expectations, and present value—all explained in simple terms.

Cash Flow: The Lifeblood of the Business

Every business runs on cash flow—the money it makes after covering all its expenses.

When valuing a business, we usually measure cash flow in one of two ways:

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This one strips out some costs to focus on operating profit. It’s great for businesses where management is more hands-off or for larger companies.

SDE (Seller’s Discretionary Earnings): Think of this as the total profit available to a hands-on owner. It includes not just EBITDA but also the owner’s salary, perks, and any one-time or personal expenses.

Both of these measures show how much cash the business has generated in the past, which is key to predicting future cash flows and how much financing the business can support.

Future Expectations: Where Is the Business Headed?

Next, we look at what’s ahead—because buying a business is all about what it will do in the future, not just what it’s done in the past.

Here’s how we predict future performance:

Past Performance: What has the business done so far? Past trends in revenue and profit give us clues.
Growth Potential: Can the business grow? Factors like new investments, marketing, and untapped opportunities play a role here.
Capacity: Does the business have the resources—like staff, equipment, or space—to meet more demand?
Market and Industry Trends: What’s happening in the industry? Is demand growing or shrinking? How’s the competition?

By looking at all these factors, we can estimate how much money the business will likely bring in down the road. The more uncertainty in any of these factors the greater the investment risk, the key factor in determining value.

Present Value: What’s It Worth Today?

Now comes the fun part: calculating what those future cash flows are worth today. Why? Because a dollar today is worth more than a dollar tomorrow (thanks, inflation and investment opportunities!).

Here’s how we figure that out:

Expected Cash Flow Amounts and Timing: How much money is coming in, and when?
ROI (Return on Investment): This is the rate of return investors want for putting their money into the business.

The ROI depends on two big factors:

The Business Itself: Things like customer loyalty, product demand, competition, employee stability, and how steady cash flow has been all affect risk—and higher risk means higher ROI.
The Market: When interest rates rise, investors demand higher returns, which lowers the value of future cash flows.

The less risky and more stable your business looks, the more valuable it is in the eyes of investors.

Making It Simple: A General Ballpark

While most people understand the concept of valuing a business, doing the actual calculation can be complicated. For those looking for a general estimate, there’s a simple rule of thumb:

Take the cash flow from the last 12 months (SDE or EBITDA).
Multiply it by the median cash flow multiple for the industry.

For most industries, the median multiple is between 2.5 to 3.5. These industry multiples are widely available and can be found with a quick search.

Example:

Let’s say a construction company has an SDE of $1 million over the last year. The median EBITDA multiple for the construction industry is around 3.1. Based on this, the company’s estimated value would be approximately $3.1 million.

However, a word of caution: multiples only provide a rough guide. They treat every company in an industry as the same, regardless of differences in size, growth potential, customer base, and every other critical factor. While helpful for initial estimates, multiples are not a reliable way to value a business for a transaction.

This is where an experienced valuation expert becomes essential. They’ll consider the unique strengths, risks, and opportunities of your business to provide an accurate valuation. Keep in mind that even most brokers and CPAs do not have the specialized background necessary for reliable business valuation.

Wrapping It Up – Money In Your Pockets

Because we deeply understand valuation principles, we’re able to market our listings in a way that justifies higher values—above what you’d get by simply applying industry multiples. By highlighting the unique strengths, growth opportunities, and reduced risks of your business, we attract buyers willing to pay premium prices.

If you’re thinking of selling (or even just curious), this framework gives you a solid foundation. For a precise valuation tailored to your business—and a marketing strategy designed to maximize its value—reach out to us. Let’s uncover what YOUR business is truly worth!