What is my business actually worth? An owner's primer on business valuation.

Most owners learn what their business is worth by hearing what a competitor sold for, then assuming the same multiple applies. That is not how valuation works. A defensible answer requires three things: a normalized earnings number, a defensible multiple drawn from market evidence, and an honest reading of the company's risk profile. This article walks through that process the way a CPA would explain it to a client at the kitchen table.

Why owners overestimate value, and why it costs them at the table

The single most-common source of disappointment in a sale process is not the buyer; it is the seller's prior expectation. Owners arrive at the table with a number they have carried for years, anchored on a competitor's sale, a banker's casual comment, or a back-of-the-envelope multiple applied to top-line revenue. The actual market evidence is almost always lower, and the gap is wide enough to kill deals.

The Pepperdine Private Capital Markets Report tracks this gap directly. In its 2025 edition, Dr. Craig R. Everett's survey of credentialed appraisers found that roughly 31% of engagements ended without a transaction, with the valuation gap driving 26% of those failures. In about 84% of those gaps, the spread between buyer and seller expectations sat between 11% and 30%. That is the gap a defensible valuation, performed early, would have closed before the process began.

The three approaches to value, in one paragraph each

Every credentialed valuation in the United States, regardless of who performs it, operates within a framework of three approaches. The income approach values the business at the present value of its expected future cash flows, using either discounted cash flow analysis or a capitalization of earnings method. The market approach values the business by comparing it to actual transactions involving similar companies, drawing from databases like BVR DealStats, Pratt's Stats, and the public guideline-company method. The asset approach values the business at the adjusted net asset value of its underlying balance sheet, which matters most for asset-heavy or holding companies and rarely drives an operating business's value.

A defensible valuation does not pick one. It uses all three where applicable, weights them by the facts of the engagement, and reconciles to a conclusion. The AICPA's Statement on Standards for Valuation Services No. 1 expects appraisers to consider each approach and document why each was used or excluded. Brief 3 in this library walks through each approach in depth; for the purpose of this primer, the point is that a number without a method is a guess, and a method without a reconciliation is incomplete.

SDE versus EBITDA: which one applies to your business

Cash flow is the operative number in nearly every private-business valuation, but two different definitions of cash flow apply at different sizes of business. Seller's Discretionary Earnings, or SDE, measures what an owner-operator earns from the business: net income plus interest, taxes, depreciation, amortization, one owner's salary and benefits, and one round of discretionary add-backs. EBITDA, or earnings before interest, taxes, depreciation, and amortization, measures what a corporate buyer would earn from running the business with a hired manager in the owner's seat.

The inflection point sits around $1M to $2M of normalized earnings. Below it, the buyer pool is dominated by individual owner-operators, SBA-financed acquisitions, and small search funds, all of whom underwrite to SDE. Above it, the buyer pool tilts toward private equity, family offices, and strategic acquirers, who underwrite to EBITDA with a market-rate manager replacement assumed. Which number applies to your business changes who your buyers are, how they finance, and what add-backs survive their Quality of Earnings analysis.

Source: synthesis of IBBA Market Pulse Q4 2025, BizBuySell 2025 Year-End Insight Report, GF Data Resources Q1 2025.

The multiple is a conclusion, not an input

Every owner asks for a multiple. Most ask the wrong question. A multiple is not a coefficient you apply; it is a conclusion you arrive at after the work is done. Credentialed appraisers derive multiples from databases of completed transactions, adjusted for size, sector, growth profile, customer concentration, recurring revenue mix, and a long list of other risk factors. The Pepperdine PCM 2025 survey found that the guideline-transactions method carries 33% average weighting in private-business appraisals, the largest of any single methodology.

"The honest answer to 'what is my business worth' starts with 'tell me about your customer concentration, your recurring revenue, your second-in-command, and your last three years of EBITDA.' The multiple is the last thing we calculate, not the first."

Sara F. Gonzalez, CPA · Managing Partner, KGOB

When you see a published "industry average" of 4x or 6x, that figure is a median across thousands of transactions with widely varying risk profiles. Your business might trade at the median, or it might trade two turns lower, or two turns higher. The work of valuation is figuring out which.

Normalizations and add-backs: legitimate versus aggressive

Tax returns understate earnings for almost every owner-operated business, because the owner has been managing the business for tax efficiency rather than for sale presentation. Normalizing those tax returns to "what the business actually earns, separated from how the owner runs it" is the first technical step of any defensible valuation. Some add-backs are universally accepted; others are routinely rejected in Quality of Earnings analysis. Knowing the difference, in advance, prevents painful surprises later in the diligence process.

Add-backs buyers typically accept:

• One owner's compensation, replaced with a market-rate manager salary
• One-time professional fees not expected to recur (the sale process itself, one-off litigation)
• Personal vehicles, personal travel, personal insurance run through the business
• Family members on payroll who do not work in the business
• Pandemic-era one-time costs (PPE, temporary remote-work infrastructure)

Add-backs buyers typically reject:

• Aspirational cost savings ("if I cut these contracts, EBITDA would be higher")
• Revenue not yet booked but expected ("we are about to land a big customer")
• The "if you fired me" calculation that assumes the business runs without replacement
• Recurring discretionary spending presented as one-time
• Owner perquisites that the next owner will also want or require

Risk drives the multiple as much as size does

A $5M EBITDA business with three large levers right will trade at 8x. The same $5M EBITDA business with those levers wrong will trade at 5x. That spread is $15M of enterprise value on identical earnings, and the levers are not secrets. They are the ones every CPA firm and M&A advisor has been watching for thirty years.

The three highest-impact levers, in our experience:

1. Customer concentration. Any customer above 20% of revenue triggers a detailed buyer review; above 30%, some buyers decline the process entirely (FOCUS Investment Banking, July 2025).
2. Owner dependency. If the business cannot run for ninety days without you, you are selling a job, not a business. The discount ranges from 10% to 30% depending on sector.
3. Recurring revenue. A $4M EBITDA HVAC company with 60% recurring revenue trades at 8x to 9x. The same business with 20% recurring trades at 5x to 6x. That is $12M to $16M of enterprise value difference on identical earnings (CT Acquisitions Manufacturing Report 2026).

Indicative valuation versus formal appraisal: when each is enough

The AICPA's SSVS No. 1 distinguishes a valuation engagement, which produces a Conclusion of Value, from a calculation engagement, which produces a Calculated Value. The fee bands differ accordingly. A formal valuation engagement for a $5M business typically runs $7,500 to $15,000 and takes four to six weeks. A calculation engagement runs lower. A productized indicative valuation, like our Strategic Snapshot, runs $995 and produces an indicative range against the same methodological framework, in seven business days.

Each tool has a use. A $995 indicative valuation answers what is the directional answer, before I make a planning decision. A formal appraisal answers what do I file with the IRS, with the court, with the ESOP trustee, with the SBA lender. The mistake is using one to do the job of the other. Brief 4 walks through that decision tree in more detail.

Who is asking the question? IRS, lender, divorce court, buyer

The same business produces different values under different standards. Fair market value under IRS Revenue Ruling 59-60 governs estate and gift tax matters. Investment value reflects what a specific buyer is willing to pay given their synergies. Fair value under state divorce statutes varies by jurisdiction and often strips the discounts that apply in tax matters. Liquidation value applies when continuity is not assumed.

Before you ask what your business is worth, ask who is asking and why. The answer changes the methodology, the discounts, and the number. Brief 5 in this library walks through each of the five standards.

How LTG's Strategic Snapshot produces an indicative range

The Strategic Snapshot applies a productized methodology built by KGOB over thirty-eight years of valuation work across every sector a Main Street CPA firm serves: trades, restaurants, healthcare practices, manufacturers, professional services, and technology. The buyer supplies a small set of financial inputs (revenue, normalized earnings, growth, customer concentration, recurring revenue mix, sector code). The model applies pre-set computations and produces:

• An indicative enterprise value range (low, median, top quartile)
• A scorecard across the ten strategic value levers
• The three priority moves we estimate would move your multiple the most over a 24-month runway
• A tax-efficiency review against federal and North Carolina law

The Snapshot is an indicative valuation, not a formal appraisal. It is intended to be the first conversation an owner has with the question, not the last. For SBA loan documentation, gift or estate filings, ESOP valuations, or litigation purposes, retain a credentialed business appraiser (ASA, ABV, CVA, or CBA). Brief 4 covers when the upgrade is required.

What to do with the number

Once you have a defensible range, three decisions follow. First, decide whether the range supports your retirement number after taxes and fees (Brief 10 walks through the freedom-point math). Second, decide which of the ten levers to move over a 24-month runway, in order of impact. Third, decide whether the business is at the right stage of readiness for the path you are considering: a third-party sale, an ESOP, a family transition, or a management buyout (Brief 11 compares the four paths).

None of these decisions becomes easier with time. Owners who plan an exit 36 months in advance keep, on average, materially more of the after-tax proceeds than owners who react to an inbound offer. The market is reasonably efficient. The owners who do best in it are the ones who run their preparation on a longer clock than the buyers do.