4 Ways Buyers Will Value Your Business

Welcome back to another edition of The Wise Exit newsletter. This week, we’re covering: 

• The 4 methods buyers use to determine what your business is worth

• 5 questions to ask yourself to understand your valuation position today

• 3 action steps to take this week to start maximizing your number

Let’s get to it.

💡 This Week’s Big Idea

The 4 Ways Buyers Value Your Business (And Why It Matters Before You're Ready to Sell) 

Most of the founders I talk to have a number in their head. A rough idea of what they think their business is worth.

Unfortunately, that number usually isn't grounded in how buyers actually think about it.

The reality is, your business doesn't have one single value. It has several. And the method a buyer chooses to apply will depend on your industry, your business model, and what they're trying to justify.

That's why it’s important for any founder to understand the four ways a buyer will value your business:

1. Earnings-Based Valuation:

This is the most common starting point for small to mid-sized businesses. How it works is a buyer looks at your EBITDA or SDE (Seller's Discretionary Earnings), then applies an industry-specific multiple to arrive at a value. A simple example of this:

If you run a SaaS company doing $4M in EBITDA and similar companies sell at an 8x multiple, your estimated value is $32M. If you own a marketing agency with $1M in SDE and the typical multiple is 3x, you're looking at roughly $3M.

The multiple is where your real negotiation leverage lives.

2. Market Comparables:

This method looks at what similar businesses in your industry actually sold for, then benchmarks your company against those transactions. Think of it the way a real estate agent values a home — by looking at recent comps in your neighborhood.

If three competitors sold at an average of 1.2x revenue and your company does $10M annually, that puts your estimated value around $12M.

The challenge here is that private business sales aren't always public, so finding clean and comparable data takes real expertise (one of the reasons why having the right M&A team is so important).

3. Income-Based Valuation:

Where earnings-based methods look backward at historical performance, income-based methods look forward at your future earning capacity. The most common version is the Discounted Cash Flow (DCF) model, where a buyer projects your future cash flows and discounts them back to today's value.

It’s an approach that rewards businesses with predictable, recurring revenue. Meaning, if your cash flows are stable and visible, you'll get credit for future value too, not just what you've already produced.

But if your revenue is lumpy or unpredictable, this method can actually work against you.

4. Cost-Based Valuation:

What would it cost to build this business from scratch today? That’s the question this method is asking. How it works is that a buyer adds up your tangible and intangible assets (equipment, inventory, technology, brand equity, customer relationships) to arrive at a replacement value. An example of this:

For a manufacturing company, that might mean $2.5M in equipment, $600K in inventory, $1.8M in facility, and another $500K in systems and brand development, which adds up to a total of $5.4M.

This approach tends to set a floor value, so it works best for asset-heavy businesses. The downside is, it largely ignores earning power and growth potential.

The thing to remember is that sophisticated buyers don't just pick one method and stop there. No, they work across several approaches to stress-test a number.

Which means the founders who understand all four and have built their business to perform well across each are the ones who walk away with the best exit outcomes.

If you want to understand where your business stands across these methods, just reply to this email. We're always happy to walk you through it.

❓ 5 Key Questions to Ask Yourself This Week

1️⃣ Do I actually know my current EBITDA and what multiple businesses like mine are selling for right now?

2️⃣ If a buyer used market comparables to value my business, would I be happy with where I land relative to recent transactions in my industry?

3️⃣ How predictable and recurring is my revenue? Would an income-based valuation work for or against me?

4️⃣ Are there assets in my business that I haven't thought about as value drivers?

5️⃣ If I had to explain to a buyer why my business deserves a premium multiple, could I make that case clearly and with data to back it up?

📋 3 Action Items for This Week

☑️ Calculate your current EBITDA and look up your industry multiple: Don't wait for a buyer to run these numbers for you. Know your baseline now so you understand the gap between where you are and where you want to be.

☑️ Identify your biggest valuation risks: Whether it’s customer concentration, inconsistent margins, or undocumented processes, pick the top one or two things that could pull your number down, and start addressing them this week.

☑️ Run your numbers through our free valuation calculator: It takes only about 60 seconds but will give you a much better idea of where you stand and what you can do to increase your valuation. You can check it out here.

That's all for this week.

Remember, your valuation isn't something you figure out when you're ready to sell. The founders who achieve the best outcomes are the ones who understand their numbers in advance, way before they’re in the middle of an exit.

Whenever you're ready to dig into your specific situation, simply reply to this email or contact us here.

Talk next week,

Brian Dukes
Managing Partner at Exitwise