What Is My Company Worth? How Buyers Actually Value Founder-Owned Companies

A lower-middle-market company is worth a multiple of its normalized earnings, and both halves of that sentence are where owners get surprised. Not revenue. Not what a competitor supposedly sold for. Not what you need for retirement. Earnings, normalized, times a multiple drawn from what similar companies actually sold for.

Here is how that works in practice.

Start with the right earnings number

Buyers don't value your tax return's bottom line. They value the true economic earnings of the business, which requires normalization.

For owner-operated companies, the standard measure is seller's discretionary earnings (SDE): net income, plus the owner's salary and benefits, plus interest, taxes, depreciation and amortization, plus legitimate one-time or personal expenses run through the business. For companies with a management layer that runs day-to-day operations without the owner, buyers shift to adjusted EBITDA, which subtracts a market-rate salary for whoever will actually manage the company.

This distinction matters enormously at the boundary. A company with $1.2M in SDE where the owner works sixty hours a week is a very different asset than one with $1.2M in EBITDA after paying a general manager. Buyers pay more for the second one, because they're buying earnings, not a job.

Where the multiple comes from

The multiple is not a mystery and it is not negotiable by wishful thinking. It comes from closed transactions, actual sales of similar companies in similar size ranges. Listing prices are irrelevant; they measure what optimistic sellers hoped for, not what the market paid.

As a general shape of the market: smaller owner-operated companies trade on SDE multiples, and as earnings grow past roughly $1M and the business becomes management-run, buyers shift to EBITDA multiples that run meaningfully higher. Size itself commands a premium. The same quality of business is worth more per dollar of earnings at $3M in EBITDA than at $500K in SDE, because more buyers can finance it and the earnings are considered more durable.

The five factors that move your multiple

Within any industry's range, five things determine whether your company trades at the bottom or the top:

Earnings quality. Clean books, consistent margins, and add-backs you can document with receipts. Every add-back a buyer's lender can't verify comes out of the price.

Customer concentration. If one customer is more than 20% of revenue, expect the question in every management call. Over 30%, expect it in the price.

Owner dependence. If the customer relationships, the pricing decisions, and the technical knowledge live in your head, the buyer is purchasing a business that partially walks out the door at closing. Documented processes and a capable second layer are worth real money.

Recurring revenue. Contracted, repeating revenue (maintenance agreements, multi-year service contracts, subscription billing) trades at a premium to project-based or transactional revenue in every industry.

Growth trajectory. Buyers pay for the future, evidenced by the past. Three years of steady growth beats one spectacular year.

What this means for your planning

Two takeaways. First, get a real valuation twelve to thirty-six months before you want to exit, not because you're selling now, but because every factor above is fixable with time and none of them are fixable in the middle of a sale process. Second, be skeptical of any number that isn't built from closed comparables and normalized earnings. A valuation you can't defend to a buyer's lender isn't a valuation; it's a wish.

Most owners get one exit. Knowing your real number, and what moves it, is where a good one starts.

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