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When a business broker values your company, they assess two main things: how much the business earns and how risky or sustainable those earnings are from a buyer’s perspective. The multiple you see at the end of that process reflects, among other things, the market’s view of that risk, the quality of the business, and demand from potential buyers. The key to understanding the number is understanding what drives each assessment, and where your business lands within them.

If you have an offer in hand, or you’ve recently spoken with a broker or M&A advisor about what your business might be worth, you’re probably sitting with one of two questions: is this number fair, or why is it lower than I expected? Understanding how an advisor gets to that number can help you assess the valuation more objectively and identify areas of the business that may be worth improving before you go to market. Here is how that number is determined.

The earnings figure matters more than the multiple

The multiple gets most of the attention, but the earnings figure deserves as much, if not more, attention. The earnings figure the multiple is applied to, typically adjusted SDE (Seller’s Discretionary Earnings) or adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), depending on the size and nature of the business, is where a significant portion of the valuation is determined, and it’s far more variable than you might think.

Recasting your financials means adjusting your reported income to better reflect the normalized earnings a buyer can reasonably expect from the business going forward. The specific adjustments depend on whether the business is being valued using SDE or EBITDA. For an SDE-based valuation, owner compensation and certain owner benefits may generally be added back. For an EBITDA-based valuation, owner compensation may instead need to be normalized to reflect the market cost of replacing the owner’s role. Nonrecurring expenses, certain discretionary expenses, and other appropriate normalization adjustments may also be considered.

The goal is not to create the highest possible earnings number. It is to arrive at a defensible view of the earnings the business is reasonably capable of generating under new ownership.

Here is where the judgment comes in. Some add-backs are clean and relatively straightforward: for example, certain owner-specific expenses or a clearly documented, nonrecurring professional fee. Others are more subjective and may be challenged by a buyer.

A broker who aggressively credits every possible add-back to produce a higher earnings figure may be doing you a short-term favor and a long-term disservice. Buyers will test those adjustments during their own financial analysis and due diligence, and larger transactions will almost certainly involve a formal Quality of Earnings review. A broker’s job is to recast your financials accurately and defensibly, not optimistically.

This is important for sellers to understand: a $100,000 adjustment to EBITDA does not just change earnings by $100,000. If the business is valued at a 5.0x multiple, that adjustment can theoretically affect enterprise value by $500,000. That is why both buyers and sellers tend to spend considerable time evaluating normalization adjustments.

We recommend looking at how valuation concepts like SDE and EBITDA interact in practice before your first broker conversation.

The multiple is a judgment about risk

Once the earnings figure is established, the advisor develops an appropriate valuation range and considers what multiple the market may support. The multiple reflects what a buyer believes about the durability and transferability of your earnings, but it is also influenced by factors such as company size, growth, margins, industry dynamics, recent comparable transactions, buyer demand, and prevailing market conditions.

A business that earns $1M per year and has a strong likelihood of maintaining or growing those earnings under new ownership will generally support a higher multiple than a business earning the same $1M but carrying greater risk about whether those earnings survive the transition. The greater the perceived risk to future cash flow, the more return a buyer will generally require on the investment, and that typically translates into a lower valuation.

There are many factors that can influence a multiple, but several come up repeatedly in privately held business transactions:

• Owner dependency. If your business runs because of your relationships, your technical expertise, or your daily presence, a buyer has to evaluate what happens when you leave. Can the existing management team absorb your responsibilities? Will a buyer need to hire someone to replace you? Are important customer or vendor relationships tied to you personally? The more the business depends on you without a clear transition plan or management infrastructure, the greater the perceived risk can be. Owner dependency is one of the most consequential valuation factors for sellers who have been deeply involved in day-to-day operations.

• Customer concentration. A distribution business with $8M in revenue where one customer represents 35% of sales is a very different risk profile than the same business with its top customer at 10%. But concentration alone does not tell the entire story. A buyer will also want to understand the length of the relationship, contractual protections, customer retention, switching costs, historical revenue trends, and why that customer continues doing business with the company. High concentration can affect value, but the facts behind the concentration matter.

• Revenue quality. Recurring revenue, long-term contracts, and diversified customer bases can create greater visibility into future performance and are generally attractive to buyers. Project-based or seasonal businesses can still command strong valuations when they have consistent historical performance, a strong backlog, repeat customers, or other evidence that future revenue is predictable. The important question is not just whether revenue is “recurring,” but how much visibility a buyer has into what the business is likely to generate after closing.

Other factors matter as well: historical and projected growth, gross margins, EBITDA margins, management depth, employee retention, capital expenditure requirements, working capital needs, competitive position, supplier concentration, barriers to entry, and the industry’s overall outlook. A good advisor is trying to look at the company through the same lens a sophisticated buyer will eventually use. The valuation should be supported not only by a formula, but also by an understanding of how buyers are likely to underwrite the specific risks and opportunities in the business.

Understanding what factors increase your business valuation before you go to market gives you time to address them.

Marketability: how many buyers exist for your business

A third element shapes the valuation conversation: how many qualified buyers exist for your specific business, given its industry, size, geography, characteristics, and expected transaction value.

A well-run HVAC company in a growing metro area with documented systems and a trained technician base may have a broad buyer pool. Individual buyers, private equity groups, existing PE-backed platforms, family offices, and strategic acquirers may all have an interest in that type of opportunity, depending on the size of the company.

A specialty manufacturer with proprietary processes, customer relationships that took 20 years to build, and equipment that requires significant expertise to operate may have a more specialized buyer universe. A narrower pool can make it harder to create competitive tension, while a broad universe of credible buyers can improve the probability of receiving multiple offers and stronger terms.

That does not mean a niche business is worth less. In some cases, specialization, proprietary capabilities, or a defensible market position can make a company more valuable to the right strategic buyer. The important question is whether there are enough buyers with both the strategic rationale and financial ability to complete the transaction.

A broker or M&A advisor who understands your industry and has sold businesses like yours can tell you where your business sits in that buyer pool and what the prospective buyer universe may look like before you ever go to market. That context is important when you evaluate any number you receive.

Valuation multiples vary significantly by industry, but industry averages should be viewed as a starting point rather than a valuation by themselves. Two companies in the same industry with the same EBITDA can have very different values based on their growth, customer base, management team, margins, recurring revenue, and other company-specific factors.

What the broker should be doing

A business broker’s valuation translates the financial and qualitative characteristics of your business into a number or a valuation range that will be tested by a real-life buyer market. The broker isn’t just calculating; they are anticipating how buyers will respond when they see your financials, your customer concentration, your operations, your management team, your growth prospects, and the risks they will inherit after closing.

Some brokers will present aggressive valuations to win the engagement. An aggressive valuation can certainly be appealing to an owner, but it does not create value by itself. If the market does not support the number, the seller may eventually face lower offers, extended time on the market, or a price adjustment later in the process.

On the other hand, you also don’t want an advisor who simply defaults to the most conservative number. The goal should be to understand a realistic range, develop the strongest defensible case for the business, and then run a process designed to let qualified buyers compete for the opportunity.

The most useful thing a broker can do is give you a defensible range and explain what would need to be true to achieve the higher end of it. Ask for the rationale behind the valuation, not simply the headline number.

If you’re comparing brokers or evaluating an offer you’ve already received, take time to review the right questions to ask before hiring a business broker.

Business value and closing proceeds are not the same number

This is an area that owners frequently misunderstand. If someone tells you your business is worth $10 million, it is important to understand exactly what that number represents. In many lower-middle-market transactions, valuation is discussed on an enterprise value basis. The amount ultimately received by the seller can then be affected by items such as debt, working capital adjustments, rollover equity, seller financing, earnouts, and other components of the deal structure.

A $10 million enterprise value therefore does not necessarily mean a $10 million check to the seller at closing.

This is also why comparing two offers solely by purchase price can be misleading. An offer with more cash at closing, fewer contingencies, a reasonable working capital methodology, and limited contingent consideration can ultimately be more attractive than a higher headline valuation with much different terms.

What you can do with this information

The sellers who engage most productively in the valuation conversation understand that the earnings figure and the multiple can both change, but usually for different reasons. You do not increase value by arguing for another turn of the multiple. You increase the likelihood of a stronger valuation by improving the underlying business and building a defensible case for its earnings and future prospects.

Clean, well-documented financials make the recast easier and the add-backs more defensible. Reduced owner dependency, a stronger management team, greater revenue visibility, and reduced customer concentration can make the business less risky to a buyer. A diversified customer base can also improve the durability of earnings, although, as with every valuation factor, the details matter.

Growth can be equally important. Buyers are typically purchasing the future earnings of the company, not just reimbursing the seller for its historical results. A business with credible growth opportunities, a strong backlog or pipeline, and evidence that recent growth can continue may be viewed differently than a business with the same trailing earnings but a declining outlook.

You can work on all of this. The broker’s valuation conversation is most useful when you treat it as a diagnostic, not a verdict. It tells you where you are today and, just as importantly, what buyers are likely to focus on.

The next question is what it would take to be somewhere better. For some owners, that may mean going to market now. For others, the better decision may be to spend the next 12 to 24 months strengthening the business before pursuing a transaction. An advisor should be willing to tell you both.

When you are ready to have that conversation, Viking’s advisors have been through it with more than 950 businesses over 30 years of M&A experience. An initial conversation is an opportunity to understand where the business stands today, how the market may view it, and whether there are steps worth taking before you pursue a sale.

Reach out when you are ready.

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