Understand the methods and rationale buyers will use to value your business.

The first thing most business owners want to know when they contemplate selling their company is usually what they would pocket from the transaction. Valuation is a topic you and your transaction advisor will revisit multiple times throughout the deal process, including when setting reasonable price range expectations, while negotiating a price or formula and terms with a buyer when signing an LOI, and in understanding the impact of buyer due diligence findings when finalizing transaction price.

This article is heavy on valuation rationale. But if you want to skip straight to applying these concepts to your business, visit our Business Valuation Calculator tool.

When approaching this topic, many sellers hope to learn a particular number they can demand be paid for their business to ensure they get a “fair” deal. The most important first step is to accept early in the process that there is no such number. While there are formal valuation approaches that are used by credentialed valuation professionals for a variety of legal and regulatory purposes, these are simply not useful in M&A transactions. Further, for reasons we will address in this article, the markets for private companies simply don’t operate like the New York Stock Exchange or the market for most other goods and services you have encountered. This article describes how your advisor will help you establish a range of reasonable prices your company may fetch; but it is ultimately the independent value assessments of individual buyers that will drive the price and terms at which your business will sell. The marketing approach your advisor uses is far more important to your outcome than any analytical attempt to pinpoint a “fair” price. That said, understanding the concept of multiple arbitrage and how strategic buyers use it to their advantage will help you avoid leaving money on the table.

Valuation in M&A is not straightforward, and a single formula won’t work for all situations. There are many factors that figure into the final price your business will fetch (intellectual property, usable tax shields, revenue and cost synergies, etc.). But the core component of value is usually the target’s future earnings. Understanding the methods used to value earnings in the M&A market and the principles that underpin them will allow you to set and maintain realistic expectations throughout the deal process.

In this article, we will cover:

• income-based valuation theory;
• the practical benefits of using market multiples for valuation;
• the differences between net income, earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted EBITDA, and seller discretionary earnings (SDE);
• determining which earnings metric is most appropriate to use in different situations; and
• valuing your business using the earnings metric and multiple most suitable for your transaction.

Key Conclusions

This article is intended for business owners who are busily building engines of growth in the economy, don’t operate in the M&A market on a daily basis, and are contemplating the sale of their privately held company. If this describes you, the following six-point synopsis–while it may not be entirely clear right now–will give you a quick peak at where this material is headed:

1. The income approach to valuation takes the general form: value = the net present value of future cash flows. This is a discounted cash flow (DCF) model.

2. The general form of the market approach to valuation is: value = earnings x price-to-earnings ratio.

3. For a minority interest in a publicly traded company, the buyer takes a non-controlling investor perspective, and can use a one-step market valuation approach: equity investment value = number of shares x [the company’s net income per share x the average ratio, for comparable companies, of market capitalization / net income].

4. When contemplating the purchase of the majority or entirety of a privately held company, the buyer takes a control perspective, and uses a two-step valuation approach of computing enterprise value (EV) first, then deducting the company’s net debt and making a net working capital adjustment.

5. For the purchase of a non-owner-operated company, the buyer takes an investor perspective: total equity value = [the target company’s adjusted EBITDA x the average ratio, for comparable transactions, of EV/adjusted EBITDA] – net debt +/- net working capital adjustment.

6. For purchase of an owner-operated company, the buyer often focuses on seller discretionary earnings (SDE) and takes an income replacement perspective: total equity value = [the target company’s SDE x the average ratio, for comparable transactions, of EV / SDE] – net debt +/- net working capital adjustment.

If these points already make perfect sense to you, you can skip to the Multiples Analysis section. If not, return to them when you are through reading. They are meant to tether the material to the main takeaways you need to understand valuation.

Throughout this article, we attempt to string separate financial markets together with a common finance thread. We’ll find that while these markets can be linked loosely, it is hard to tie them together in a neat bow. But by examining some of the differences in the dynamics at work in different markets as we consider them, we can demystify differences in the valuation practices used and results observed in them. The article concludes with an analysis of valuation multiples in the lower middle market, and the implications for exit planning.

Article headings:

• The Public Markets: A Foundation for Key Valuation Insights
• The M&A Market–A Modified Perspective on Performance and Valuation
• Different Multiples for Different Income Metrics
• Don’t Count Your Chickens…Purchase Price Adjustments
• Refining EBITDA
• When EBITDA is Used to Value Deals
• When SDE is Used to Value Deals
• Computing SDE
• Using SDE to Value Your Business
• Multiples Analysis
• Conclusions

The Public Markets: A Foundation for Key Valuation Insights

Traditional finance tools are a great starting point in learning how the market will value your company. The easiest place to observe these in action is the market for publicly traded stocks.

In the public equity markets, price discovery is easy, at least for liquid stocks. A company’s price per share is measurable at every moment of each trading session. If Company X’s stock is trading at $52.00 per share at a given time, this serves as an objective indication of the market’s consensus of the stock’s value. Still, investors can disagree with whether that is a reasonable value on the basis of technical, fundamental, or macroeconomic factors. So it is still perfectly reasonable for an individual investor to question whether the $52.00/share market consensus is too high, too low, or just the right price to reflect the stock’s “true” value.

One way to try to verify it is to compute the net present value of the company’s estimated future cash flows. DCF models take on a few basic forms, but they all reveal that value is a function of four things: size, profitability, growth, and risk. It is the conceptually correct way to value an investment, but it is only as reliable as the investor’s ability to accurately forecast the amount and timing of all future cash flows from the investment, and to estimate the appropriate discount rate. The discount rate used is the market-required rate of return on the company’s equity minus the company’s assumed growth rate of earnings. Although this is a challenging exercise, equity market analysts do use it to set price targets and make judgments about whether stocks are currently under-, over-, or fairly-priced. Different analysts covering even mature, large-cap publicly traded companies routinely come to very different valuations using DCF models. Nevertheless, your buyer will leverage your budgets and forecasts to conduct DCF analysis on your company’s future earnings too as part of their due diligence process, and in forming their own assessment of your company’s value.

But stock investors also use another method that, while less conceptually satisfying, is derived directly from a simplified form of DCF math, is very intuitive, and is based on more concrete inputs. It is called comparable company analysis (CCA), and, like the stock’s current trading price, it relies heavily on what the rest of the participants in the stock market think. Known as a “market method” approach, CCA combines a company’s per-share stock price with another objectively observable number: the company’s published net income per share, also referred to as earnings per share (EPS). “Trailing earnings per share” refers to the last 12 months of historical net income on a per-share basis. The investor may use judgment to adjust trailing EPS to help ensure it reflects the company’s persistent earning power. The investor may also convert it to a “forward earnings” estimate by multiplying it by 1+ g, where g is the company’s expected growth rate of earnings. For instance, if Company X’s trailing EPS is $4.00 and its anticipated earnings growth rate is 5%, then its estimated forward EPS is (1+0.05) x $4.00 = $4.20. Dividing the company’s current trading price per share by its per-share earnings produces its price/earnings (PE) ratio. Company X’s trailing PE ratio is $52.00/$4.00 = 13.00x, and its forward PE ratio is $52.00/$4.20 = 12.38x. Forward PE is arguably more relevant since it measures price as a multiple of what a buyer is really paying for: the company’s stream of future earnings. And since the forward PE ratio is the reciprocal of the discount rate used in DCF analysis, valuation using the forward PE ratio and forward earnings is just a shortcut DCF model using simplified assumptions. But trailing PE, although based on past earnings, has the advantage of being calculated solely on observable inputs. And trailing PE is a meaningful multiple if we assume training earnings is a reliable proxy for future performance, and if the company and its peers can reasonably be expected to have similar earnings growth rates.

PE ratios can be analyzed in a number of ways. Investors can chart the PE ratio of broad market indices over time and compared to their historical means to form an opinion on whether the market is currently overpaying or underpaying for companies’ future earnings relative to historical mean levels. An investor can do the same with the PE ratio of an individual company’s stock, comparing it to the company’s own historical PE levels and its mean value over time. But most company’s PE ratios will move coincident with the broader market.

A more informative use of a public company’s current PE ratio, and the basis of the CCA method of valuation, is to compare it to the PE ratios of other companies–specifically, companies in the same industry with similar size and risk attributes. These comparable companies are also called “company comps,” and CCA is meant to reveal whether the current market price for the stock relative to its earning power is cheaper, more expensive, or on par with other, company comps. For instance, if the ten closest company comps for Company X are trading at trailing PE ratios of 10.00x, 11.25x, 11.50x, 14.00x, 9.00x, 13.00x, 9.50x, 14.50x, 10.25x, and 7.00x, then Company X’s trailing PE of 13.00x indicates the stock is trading above the 11.00x average of its company comps, and therefore that the market may be overpricing Company X. If the investor thinks Company X should be trading closer to 11.00 times its trailing earnings like its peers, they may place a limit order bidding a price of $44.00 to purchase it. But most stock investors are price takers, and the order won’t be filled unless or until market consensus pushes the price down.

The M&A Market—A Modified Perspective on Performance and Valuation

The basic principles underpinning the use of market multiples to value an investment in the stock market are the same for would-be buyers of whole companies, both publicly traded and privately held. There are a few key differences that change the approach they take, though:

• For one, buyers in the M&A market are not merely price takers. Rather, they are in a position to negotiate with management and owners over the price of the target company.

• Most middle market businesses are not publicly traded, so multiples are not available for closely comparable companies. When this is the case, CCA is broadly thought of as not being relevant, and many transaction advisors may not even prepare it (more on this later). As a result, market participants turn to comparable transactions, which provide the prices of the sales of companies comparable to the target that have sold in precedent deals.  This market method is referred to as precedent transaction analysis (PTA) or comparable transaction analysis (CTA), and the comparable transactions are referred to as “deal comps”. These are much less frequent events than simple stock trades that form the basis of CCA. There may be many other privately held peers that are very comparable to the target company, but if they have not been bought or sold recently, they cannot be used to support deal comp analysis. CTA is therefore based on a much smaller set of data points.

• An acquirer in an M&A transaction will actually gain control over the target company. This opens the ability to make operating decisions, set tax strategy, and make financing decisions like setting leverage and dividend polices.

The control perspective has a few significant implications for valuation.

For one thing, control allows a strategic buyer (one in a similar or related business) to exploit synergies in a business combination, which can therefore increase the price they are willing to pay. Buyers with different operating capabilities, market positions, and business models will have different synergy opportunities with respect to the target, so the company will have different value potential in different acquirers’ hands. The seller can’t change these opportunity sets, of course. But with the help of the right advisor, a seller can increase the likelihood of attracting buyers that can get the maximum synergy value from an acquisition of the company. Thinking beyond the bounds of your chosen business model will allow you and your advisor to anticipate synergies your company can generate for different buyers. A marketing approach that draws buyers able to achieve synergies with your company creates a bigger pie for both parties to share when negotiating, resulting in a higher exit price for the seller. These are key aspects of a well planned and executed deal process. 

Beyond valuing the synergy possibilities, the control perspective changes the way buyers value the target company’s reported earnings as well. Specifically, instead of focusing on net income, buyers in the M&A market will base valuation estimates on EBITDA. By adding certain items back to the company’s net income, buyers seek to remove these expenses from the picture to focus attention solely on the company’s core operating earnings, what it can be expected to generate on an ongoing basis. To see why this is a more appropriate valuation methodology, let’s consider each of these add-backs in turn:

• Depreciation and Amortization Expense. Depreciation and amortization represent an accounting allocation of a portion of past capital expenditures to the latest reporting period. When seeking to approximate the company’s persistent cash flow from operating activities, buyers customarily add these non-cash expenses back to net income. To the extent that these charges approximate the cost of financing capital assets and spreading the payments over multiple periods, you may find removing them to seem unreasonable. Indeed, Warren Buffet famously questioned whether users of the EBITDA metric believe capital expenditures are paid for by the Tooth Fairy! This criticism is more appropriate to the use of EBITDA as a raw measurement of a company’s profitability, but it is less of a concern when using it as the basis for a multiple in market method valuation, since both the earnings metric and the multiple being applied to it are depreciation- and amortization-free. One rationale for excluding depreciation and amortization from consideration is that variations in price levels for capital assets over time can burden peer companies with different levels of depreciation and amortization expense, despite having comparable asset bases and current and future operating income generating capabilities. Another rationale is rooted in the fact that different companies in a peer group can choose different levels of operating leverage (i.e., providing for production capacity in-house by maintaining more extensive capital asset bases and incurring higher fixed costs through depreciation, vs. incurring higher variable costs by relying on third parties for production capacity). Variability in demand will cause more net income volatility in peers with higher operating leverage, who will incur high depreciation charges regardless of sales levels. But since high-operating leverage companies have lower variable costs, it is self-evident that the depreciation add-back, swings the bias in the other direction, favoring high operating leverage peers instead of leveling the playing field. The takeaway is mixed: the benefit to valuation from adding back depreciation and amortization may be questionable, but it is established practice.

• Interest Expense. Interest is also a very real expense. But it is not a component of a company’s operating profitability. It only reflects the financing policy decision of how much the company’s capital structure is tilted toward debt. The acquirer can and will set its own policy for the level of financial leverage to maintain for the combined entity. So adding back interest expense to net income is necessary to put the target company and all comparables on a debt-free equivalent basis.

• Income Tax Expense. Taxes are a fact of life too. But buyers add income taxes back to net income for several reasons. First, it is primarily a function of pretax income, so it does not help distinguish companies’ future potential to produce operating profit. Beyond that, it can actually interfere with meaningful comparison of companies for a few reasons. For one thing, tax expense is net of the tax benefit from depreciation, amortization, and interest expense. Just as these items cloud attempts to quantify core operating earnings, so does the tax benefit derived from them. Furthermore, tax on non-operating items (such as the tax benefit from a loss on the disposition of a major capital asset) introduces differences between companies’ net incomes that are not reflective of differences in their ongoing operations. Differences in companies’ effective tax rates can also be a result of differences in tax strategy. These differences in companies are not meaningful because an acquirer will tailor tax strategy to the needs of the combined entity after purchasing a company. Current and deferred tax assets and liabilities on the target’s balance sheet can be key areas of focus for buyers when determining value; but when attempting to place a value on the company’s future earnings, income tax expense can only frustrate comparison of different target’s earning power.

To make an apples-to-apples comparison of this approach with the net income-based approach used earlier, assume Company X has 2 million shares outstanding. So Company X’s net income is $4.00 per share x 2,000,000 shares, or $8 million. CCA suggested an 11.00x PE multiple is appropriate for Company X, resulting in a valuation estimate of $88 million for Company X’s entire market cap.

Now assume there is a Company Y, which is privately owned but is otherwise similar to Company X (same industry, assets, liabilities, workforce, etc.), and also has trailing 12-month net income of $8 million. Company Y has $30 million in debt at a variable rate that was 10% over the period, so it incurred $3 million in interest. It also had $2 million in depreciation and amortization expense, and $1.7 million in income tax expense.

Starting with Company Y’s $8 million net income and adding back to it $3 million in interest, $2 million in depreciation and amortization, and $1.7 million in income taxes equals EBITDA of $14.7 million.

But we need a few more pieces of the puzzle before we can use Company Y’s EBITDA and CTA to produce a value estimate for the company.

Different Multiples for Different Income Metrics

Now that we’ve defined EBITDA and explained why it is a more useful earnings metric than net income to someone contemplating the purchase of a controlling interest in a company, the next step is to determine how to use it. Specifically, what kind of multiplier needs to be used with EBITDA?

If you’ve ever worked with mechanical fasteners, you know that when you opt for a finer thread bolt, it will only fit with a nut of the same thread count. Similarly, when using EBITDA as the earnings metric to value a company, it needs to be used with an EBITDA multiplier. Otherwise, the valuation results won’t be meaningful or useful. But what does an EBITDA multiplier look like? 

To be meaningful, a valuation multiple must be constructed with an earnings metric in the denominator, and a numerator that represents all the ownership interest(s) that have claims to whatever earnings metric was chosen for the denominator. In other words, the numerator must be a relevant match for the denominator used. Whereas net income represents residual earnings available to only the owners of the company’s equity, EBITDA represents earnings available to all capital providers–i.e., holders of the company’s equity (owners) and holders of the company’s debt (creditors). That means the multiplier we use with EBITDA needs to be constructed with EBITDA in the denominator, of course, and the sum of both the value of equity and the value of the company’s debt in the numerator. The value of a company’s equity plus the value of a company’s debt–i.e., all claims on the company’s assets–is known as enterprise value (EV). To summarize, the multiple used to value a target company using its EBITDA is an average EV / EBITDA ratio computed using comparable transactions.

Don’t Count Your Chickens…Purchase Price Adjustments

This brings us to an important implication when using EBITDA for valuation. Simple algebra tells you that multiplying EBITDA by an EV / EBITDA multiple will yield an estimate of the target company’s EV, not its equity. In other words, the seller needs to understand that some of that number belongs to the company’s creditors, so the seller won’t get a check for that full amount.

With all the finance jargon and math in the way, it can be easy for sellers to lose sight of just how analogous selling a business is to selling anything else that might be subject to some degree of debt financing. The seller and buyer of a home negotiate the price of the deal based on the value of the home itself, regardless of how much debt either of them use for it. This is intuitive, as it puts the conversation into common terms. A beautiful mansion may easily sell for $10 million based on all the fundamental factors driving its value (a lovely location, expansive square footage, ample acreage, attractive architectural style, etc.). But if the house has a $4 million mortgage on it, the seller can expect to walk away with no more than 60% of the sales price before considering commissions and other closing costs. Similarly, you may be selling a business whose negotiated value is $10 million, agreed by both parties based on the estimated value of its future pre-interest earnings. (A pre-interest earnings basis for valuation takes debt out of consideration. This is key because, just as with the house, how much financial leverage the seller has used in the company’s capital structure and how much the buyer intends to use are both irrelevant.) If you have $4 million of debt financing on the business, then 60% of the sales price will be shaved off your net proceeds solely due to the financial leverage in the company’s capital structure. Keep this analogy in mind as we continue the business valuation discussion.

Recall, the “BI” in EBITDA means “before interest” expense, so we’ve deliberately chosen to base valuation on an earnings metric that will help us cut past the differences in companies’ financial leverage levels. This is the most sensible approach to take when the investor has a control perspective, which is the case for buyouts in the M&A market. But in so doing, we end up with an approach that values all claims to the target’s pre-interest earnings–i.e., an approach that gives us an estimate of the target company’s EV.

As the seller, this isn’t the final result you are looking for, since the buyer will only pay you for the target company’s equity. Therefore, the value of debt must be deducted from the EV estimate to get the equity valuation estimate.

Throughout the deal process, frequent reference will be made to ‘the company’s value.’ Always be clear from the context what is intended by such references. If it is a valuation derived as a multiple of a pre-interest earnings measure like EBITDA, the ‘value’ being referred to is EV. The seller needs to understand clearly that the more liabilities there are on the company’s balance sheet, the further this number will be from expected net proceeds at closing. In addition to net debt (debt on the balance sheet minus company cash the seller will keep at closing), net proceeds to the seller will also be reduced by their advisor’s success fee and other closing costs. Various other items on the balance sheet of the target company will be the subject of negotiation. Non-operating assets of the company (including cash) are not covered by an earnings-based valuation and buyers interested in a pure-play deal are not interested in non-core assets, so the seller often takes these with them at closing. But if the buyer takes them, an agreed-upon price for them must be added to the earnings valuation to arrive at total transaction price. The treatment of many other liabilities follows a similar principle. For instance, a tax liability assumed by the buyer will be treated as a deduction from purchase price. Alternatively, the transaction could be structured as an asset deal in which the seller retains the obligation and no price adjustment for it is necessary. Either way, the seller does not escape the economic hit for these company liabilities.

Another important component in arriving at price is the net working capital (NWC) adjustment. To understand what this adjustment is and why it is necessary, we need to understand what NWC is, what role it plays in generating earnings, and how normal fluctuations in it can blur the valuation exercise if it is not addressed properly in the price calculation.

To generate the level of earnings used to value the company, the owner must maintain a certain level of current assets, such as accounts receivable, inventory, and prepaid expenses. Other than cash, which generally gets credited to the seller dollar-for-dollar at closing, the buyer will generally receive the company’s current assets for the earnings-based transaction price. On the other side of the NWC coin are the current liabilities that are carried as a natural result of running the business, principally accounts payable and accruals. The float these liabilities provide essentially reduces the amount of investment an owner needs to keep tied up in current assets. It is therefore customary for the buyer to assume net current assets—i.e., current assets minus current liabilities, net current assets, or NWC—as part of the deal. But when EV is priced as a multiple of EBITDA, the buyer should conceptually be entitled to ownership of NWC at an average value required to be maintained to run the business and earn that level of EBITDA.

Unfortunately, NWC fluctuates over the course of the company’s operating cycle, and the actual level of NWC on the balance sheet at the time of closing can be significantly above or below its normalized level. If this is ignored, the buyer can get significantly more/(less) in the deal at closing than is warranted by the price—at the expense/(to the benefit) of the seller—simply due to normal fluctuations. Worse, since accounting for cash and NWC items are so strongly linked, and since the seller gets credit for all cash in the business at closing, leaving this mathematical quirk unaddressed introduces an incentive for sellers to pad cash as closing approaches to the detriment of both NWC and the health of the business. This can be done by such means as slowing production to defer the cost of raw materials and other variable costs, under-investing in finished goods inventory stocks, favoring cash sales over credit sales, offering discounts to customers for early payment of receivables, and delaying payments to vendors as the closing date approaches.

To iron out this wrinkle and remove any incentive to game the NWC balance, a purchase price adjustment is included to increase/(decrease) the purchase price slightly if NWC at closing is higher/(lower) than the company’s normal average level over an agreed-upon number of trailing months. Exactly how the NWC adjustment will be calculated will be negotiated in the purchase agreement, and ideally in the LOI. But the higher that calculated bar winds up being, the more favorable the NWC adjustment will be to the buyer.

For the rest of this article, we’ll ignore purchase price adjustments, and simply continue to refer to the target company’s EV—i.e., as the product of some variation of EBITDA and an appropriate compatible multiple. Just realize that the NWC adjustment is an integral component of converting total invested capital to EV.

Refining EBITDA

Just as sharpening a pencil before drawing it across a sheet of paper will result in a finer line, refining the earnings metric for a target company before applying the appropriate multiple to it will lead to a more reliable EV estimate. You may hear this referred to as adjusted EBITDA in the context of M&A (although this term will have slightly different meanings in other contexts).

The ideal valuation would be derived from a perfect prediction of normalized future annual EBITDA. While seller and buyer can make numerous arguments of how future EBITDA is likely to depart from past performance (in opposite directions, of course), in practice, both sides use historical performance as an objective baseline and agree to certain adjustments that improve the estimate of the target’s normalized EBITDA. These adjustments include:

• Averaging more than one recent year together. Considering the trend in EBITDA may be appropriate if there is compelling reason to believe the most recent trailing 12 months is not reflective of persistent business conditions or company performance.

• Non-recurring costs. Certain operating costs will distort earnings if they are non-recurring in nature. To keep this from happening, they are added back to EBITDA. Examples include one-time branch or headquarters relocation costs, one-time computer equipment upgrades, unusual write-offs of receivables or inventory, and costs incurred for legal, consulting, or other professional services in connection with the impending transaction. After-tax P&L from discontinued operations falls into this category as well.

• Non-operating adjustments. Reported EBITDA will be understated if it contains charges for asset impairments or losses from the disposal of capital assets. It will likewise be overstated if it includes gains from capital asset sales. These must all be adjusted back.

• Accounting adjustments. When the target company’s operating earnings include activity that will not persist beyond the sale, they distort earnings. Examples include sales to related parties at below-market prices, or rents paid to affiliates at below-market rates. These items can overstate or understate operating earnings, and they must be adjusted accordingly to properly reflect post-closing profitability.

Assume Company Y is a subsidiary of a seller entity, and it enjoys the rent-free use of facilities owned by its parent, a pre-tax annual benefit estimated to be worth $2 million. Assume also that pretax income included $3 million in net gains on the disposition of capital assets during the last 12 months. Although one of these is recurring in nature and the other is not, both inflate EBITDA. But if the company also suffered a $1 million casualty loss to a manufacturing facility in excess of insurance proceeds in the last 12 months, this non-recurring item depressed EBITDA.

Starting with $14.7 million in EBITDA, adding back the $1 million casualty loss, and deducting the $3 million gain and $2 million of rent equals $10.7 million of adjusted EBITDA for Company Y.

Assume your advisor has identified six deal comps, with EVs at adjusted EBITDA multiples of 8.00x, 10.00x, 8.50x, 9.50x, 8.75x, and 9.25x, respectively. Since computing point estimates are not particularly useful or informative, in practice your advisor will use this range to compute a likely range of transaction prices to help frame expectations. But for purposes of this article, we’ll use the straight average of these, or 9.00x adjusted EBITDA, to compute an EV point estimate for Company Y of $96.3 million. We do this solely for demonstration purposes and to make some useful points.

Since Company Y has $30 million in outstanding debt, then assuming there is no cash or other balance sheet items being transferred in the deal, the value of Company Y’s equity is $96.3 million EV minus $30 million net debt, for an equity valuation of $66.3 million.

Notice that this valuation estimate for Company Y’s equity is $21.7 million lower than the equity valuation estimated for Company X. If Company X and Company Y were identical in every way, we might hope these separate approaches would bring us to identical equity valuation estimates. There are a few reasons we should not expect this, including:

• Marketability premium. A big advantage of publicly traded equities is the marketability of the investment. The mere fact that a company’s stock is listed on an exchange means there is a marketplace for the easy transfer of ownership. Public stock exchanges thus create an environment for real-time price discovery and facilitate conducting CCA. In contrast, privately held companies enjoy none of these advantages. In our example, we would expect Company X’s marketability premium to result in a higher equity valuation than Company Y, all else equal.

• Liquidity premium. Marketability obviously impacts the time it takes to exit an investment. But a closely related concept is liquidity. When marketable stocks have a high trading volume, their bid-ask spreads are narrow, and the investment can be exited without accepting deep price concessions. With a daily trading volume of literally zero, there is no liquid market for the stock of a privately held company like Company Y, so it obviously enjoys none of the liquidity premium that even thinly traded public equities have.

• Financial regulation. The financial filings of SEC registrants are subject to considerable regulatory oversight, and audit standards are more stringent. Although privately held companies may also have audited financial statements, many do not. The smaller the business and the less reliant it is on external financing, the less likely the company is to have any third-party financial oversight. This increased risk reduces the price buyers would be willing to pay for an entity like Company Y relative to more heavily regulated companies like Company X.

• Control premium. As covered previously, when an acquirer buys an entire company, they have the privilege of setting financial leverage policy. They can also set dividend policy to suit their needs. For instance, if the purposes of the acquirer are best served by paying out higher dividends rather than reinvesting the target’s earnings in the target company’s operations, they can make that decision. The buyer also has the freedom to calibrate or change operations to suit their needs, whether this involves combining operating capabilities of parent and target to cross sell or server new markets, directing the target’s capacity toward vertical integration with the parent, or achieving other cost or revenue synergies. In contrast, passive investors in a company listed on the stock market have little or no influence over such matters, nor are they positioned to exploit such changes. To the extent sellers are able to get buyers to pay for these kinds of synergies, their value is reflected in the EVs of deal comps. The buyer in our example contemplating an acquisition of Company Y has likely advantages from control, but not enough to offset the lack of marketability. (Note that both the synergy potential and the portion the seller is able to capture will differ from deal to deal, so synergies inherent in the EV / adjusted EBITDA multiples derived from CTA will likely either undershoot or overshoot the synergies your buyer ultimately will be willing to negotiate into the transaction price.)

• Data reliability. CCA can be performed from data gathered from public markets. Prices are reliable, and earnings are audited. In contrast, while some useful deal comps can be derived from public company filings if they are material enough to require disclosure, CTA also relies on privately maintained databases of M&A activity that is reported on a voluntary basis with varying levels of verification. Also, to be eligible for CCA, a company must simply be publicly traded, whereas only companies that have been recently sold can be included in CTA. Not only do CCA and CTA start out with vastly different universes of potentially useful data points, narrowing these down to companies that are truly comparable means CTA must necessarily be based on far less data. And while comparability is much easier to establish and control for when working with publicly available information, it is based on rougher assumptions when dealing with the relatively more limited information available in private markets. Finally, CCA is based on stock trades that are both temporally aligned and current. In contrast, CTA relies on transactions that have taken place in the recent past, which necessitates a tradeoff between relevance and timeliness when computing a useful valuation multiple. In CTA, including more data points means including older data points, which causes the multiple computed to reflect more stale data.

Market inefficiency. If you are familiar with the strong, semi-strong and weak forms of market efficiency theory, you know that strong market efficiency requires some very unrealistic assumptions. In short, all market participants are not fully aware of everything there is to know, so it is not surprising that participants in the public and private equity markets are not exactly on the same page. The data points used to conduct CCA and CTA are mutually exclusive and reflect the dynamics of different markets. CCA and CTA will have disconnects for this reason. There is another dimension to the inefficiency in the private market, and it stems from the relative experience and knowledge of the participants. We discuss this, and the opportunity it creates to get more value for your transaction, before concluding the article.

In the case of Company X and Company Y, general market inefficiency and lower reliability in the CTA approach are undoubtedly responsible for some portion of the difference between their equity value estimates. Those factors notwithstanding, the control premium in the value of Company Y is more than offset by the lack of marketability, liquidity, and regulatory oversight over financial reporting. So while it is useful to understand the general applicability of the market method, we should expect considerable differences in valuation in the public and private markets.

The basic approach of estimating EV and then deducting net debt to derive a valuation estimate of the target company’s equity is appropriate any time the buyer takes a control perspective and therefore uses a pre-interest measurement of earnings. But there are two important variations of pre-tax earnings measures we need to understand for valuation, each appropriate for a different kind of transaction:

• Adjusted EBITDA (used with an EV / Adjusted EBITDA multiple). This was demonstrated above with Company Y. It is appropriate when the seller is not part of the day-to-day management and operation of the target. The company, therefore, is able to operate without the constant engagement of the owner. Any personnel changes the buyer chooses to make after the transaction are discretionary, and the target could maintain operations and earnings at the status quo without them. The buyer therefore looks at the transaction from an investment perspective.

• SDE (used with an EV / SDE multiple). This is a variant of adjusted EBITDA that takes out owner-operator perks, spending at the discretion of the owner that doesn’t benefit the business, and the compensation of one owner-operator. It is also appropriate to make adjustments as appropriate for the pro forma replacement of other departing owner-operators with third-party employees at market rates. It is therefore expected that the continued generation of operating earnings will require the buyer to not only pay the purchase price, but to invest their time and effort on an ongoing basis as well. The buyer is essentially buying a hybrid of both the investment and the job of operating it, and they are expected to look at the transaction from an income replacement perspective.

When EBITDA is Used to Value Deals

Companies in the lower middle market and above will generally be sold with existing executive managers continuing to serve in their roles. Indeed, buyer employee retention programs often focus on C-suite individuals. If the target is to be merged into the buyer’s operations, numerous redundant positions may be eliminated, including at the executive level. But these are part of the buyer’s post-merger integration (PMI), and factor into the cost synergies estimated by the buyer when determining an appropriate price for the deal (the typical benefit of targeting strategic buyers where possible). The seller is often a corporate entity. But even if the seller is an individual or a group thereof, they may not be involved in day-to-day operations. Although some accounting adjustments may be needed to remove costs for seller comp or perks that won’t continue past close, these are often minor in relation to the target’s earnings.

In a situation like this, the transaction is more like an investment from the buyer’s perspective. Using EBITDA and a appropriately derived EV / EBITDA multiples is the best way to use the market method to estimate an EV range. In the example of Company Y earlier, recall this approach was used to estimate a midpoint EV of $96.3 million and equity value of $66.3 million.

Companies in the lower middle market and above will generally be sold with existing executive managers continuing to serve in their roles. Indeed, buyer employee retention programs often focus on C-suite individuals. If the target is to be merged into the buyer’s operations, numerous redundant positions may be eliminated, including at the executive level. But these are part of the buyer’s post-merger integration (PMI), and factor into the cost synergies estimated by the buyer when determining an appropriate price for the deal (the typical benefit of targeting strategic buyers where possible). The seller is often a corporate entity. But even if the seller is an individual or a group thereof, they may not be involved in day-to-day operations. Although some accounting adjustments may be needed to remove costs for seller comp or perks that won’t continue past close, these are often minor in relation to the target’s earnings.

In a situation like this, the transaction is more like an investment from the buyer’s perspective. Using EBITDA and a appropriately derived EV / EBITDA multiples is the best way to use the market method to estimate an EV range. In the example of Company Y earlier, recall this approach was used to estimate a midpoint EV of $96.3 million and equity value of $66.3 million.

When SDE is Used to Value Deals

But as transaction size falls further into the territory of small companies, the lion’s share of target companies are actively operated by one or more owners. The sale of such a business generally means the seller(s) discontinues their involvement—if not right away, then after some agreed transition period—and so the company essentially comes without management. This leaves the buyer to take up the slack in operating the business.

This extra responsibility the buyer must assume doesn’t necessarily mean the company’s equity is worth less than an equivalent company with no day-to-day involvement from the owner, all else equal. Indeed, conceptually, the value of such a transaction could be determined on an apples-to-apples basis with a pure investment acquisition by making further adjustments to EBITDA: adding back all payments to all sellers and deducting the cost to replace the lost human capital with third-party employees. There is nothing wrong with that, and a particular buyer of a particular business might value and operate the target with exactly such an approach. But there are other factors that can place downward pressure on valuation for targets in this range of the M&A continuum. The smaller the company, the more critical the experience, know-how, and relationships of any single departing employee can be presumed to be. Relative to other employees, owner-operators can be expected to have the greatest concentration of this intangible value, and buyers need to be concerned about acquiring a “headless horseman.” Part of making your company’s exit readiness preparation will be working with your advisor to ensure you can assuage these buyer concerns in both the deal’s marketing and due diligence phases.

However, it is common for the buyer of a small to mid-sized business to be an individual that assumes the operator role after closing. For this reason, the seller typically takes a valuation approach that treats the transaction as an income replacement opportunity for the buyer—as providing both the capital to acquire the company and the labor to operate it. The idea behind SDE is that it deducts all costs of generating operating earnings, other than payments to and benefits for the owner-operator; the resulting SDE can then be reinvested in the business, or extracted at the owner’s discretion in the form of comp, benefits, perks, donations to the owner’s favorite charity, etc.

Computing SDE

Assuming SDE is the metric buyers will use to value your transaction, how do you compute it? The International Business Brokers Association (IBBA) defines SDE as, “The earnings of a business enterprise prior to the following items: income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business.”

We’ve already covered the add-backs for interest, depreciation and amortization, and taxes when we converted net income to EBITDA. And we already discussed adjustments for non-operating and non-recurring items when we converted EBITDA to adjusted EBITDA. To convert adjusted EBITDA to SDE, we only need to incorporate the add-backs and adjustments that would measure the residual income left for one full-time owner-operator. Your business broker will help you understand the various items that qualify, and they will rely on you and your accountant to provide the needed add-backs. Remember: the greater the dollar value of discretionary add-backs, the higher your SDE will be. 

Let’s do one final example.

Assume Company Z is a privately held business in the same industry as Company Y, and is similar in most other respects except it is 1/4th the size: it has $7.5 million in debt and $2.675 million in adjusted EBITDA. Included in the company’s cost structure is: $150k for each of three owner-operators who each work 20 hours per week–or a total of $450k of expense–for salaries, benefits, and payroll taxes; and another $50k each–or a total of $150k of expense–for perks like personal auto leases, fuel, meals, cell phone subscriptions, club dues, charitable donations, etc.

The buyer may have various ideas in mind for the prospective purchase of Company Z. For instance, they may intend to manage the business personally and employ one of their children part time to handle the balance of the workload vacated by seller-operators. At the other end of the spectrum, they may intend to replace all the departing labor with 1.5 FTEs. Another alternative in between these extremes would be to work 20 hours personally managing the business and hire 1.0 FTE to handle the remaining vacated labor. The buyer would have to run the math on the scenario they intend to follow to realistically estimate the income Company Z would produce.

But, irrespective of the specific intentions of the buyer, the conventional valuation approach for sellers who are actively involved in management is to add back to adjusted EBITDA seller perks, compensation costs for one full-time owner-operator, and, if necessary, make adjustments to bring the costs for any remaining owner operators and other family members in line with the third-party costs the buyer will incur to replace the needed labor at market rates. This is how SDE is calculated.

Assume the buyer of Company Z would be able to dispense with all the sellers’ perks and replace the salary, benefits, and payroll taxes for all but one full-time seller-operator with one FTE at a cost of $120k. Starting with $2.675 million in adjusted EBITDA, adding back all $150k of seller perks, adding back $300k of compensation expenses to replace the full-time equivalent of one owner’s salary, and swapping out the remaining $150k of inflated seller salaries for the $120k to compensate a new FTE to replace them equals $3.155 million of SDE.

Using SDE to Value Your Business

As previously emphasized, the multiple used in valuation must fit the income metric you are using.

If SDE is the right basis for valuing your company’s future earnings, your business broker will consult industry databases to assemble an appropriate range of SDE multiples for estimating your business’s EV.

Again, we will compute a point estimate, solely for demonstration purposes. Assume you are the owner-operator of Company Z, and your advisor has identified five deal comps that sold at EV / SDE multiples of 2.75x, 4.75x, 3.00x, 4.50x, and 3.75x, respectively. Using a straight average of these, or 3.75 times SDE, the estimated EV for Company Z at the midpoint of its reasonable valuation range would be $11.8 million.

Since Company Z has $7.5 million in outstanding debt, then assuming there is no cash or other balance sheet items being transferred in the deal (and, again, ignoring any NWC adjustment), the value of Company Z’s equity is $11.8 million EV minus $7.5 million net debt, for an equity valuation of $4.3 million.

Notice that we started with the assumption that Company Z and its earnings are 1/4 the size of Company Y’s, but our valuation estimate of Company Z is considerably less than 1/4 of Company Y’s. Academically, the fact that SDE contains more add-backs than adjusted EBITDA would suggest, all else equal, that EV / SDE multiples should be higher than EV / adjusted EBITDA multiples. But, on average, small companies trade at much lower multiples than even businesses in the lower end of middle market.

Smaller companies face outsized threats from larger competitors, and their reduced scale places them at greater risk from other environmental factors. Also, owner-operated companies, by definition, suffer the drain of management experience when the seller exits. While this is not necessarily an insurmountable hindrance to the company’s future, it does carry more risk to the buyer than a company that comes turn-key with seasoned management.

If you were conducting a formal marketing process typical of an M&A advisor or investment banker to attract strategics, you could use it as a platform to credibly push back on the tendency to discount small company multiples. Otherwise, you won’t have a podium from which to fight the valuation bias of the small business buyer population you will attract. Precedent transactions for companies of comparable size will reflect this, and setting a reasonable listing price for your company should too.

Multiples Analysis

Now that you have an understanding of the mechanics of M&A transaction valuation and how your transaction price will ultimately be set, you are doubtless wondering about the range of earnings multiples that is applicable to your company. As discussed above, multiples shrink as company size drops, due to the declining risk/reward ratio that comes with moving out of the large, highly regulated public market, into the middle market, and ultimately to the small company universe. There are ways to combat this. But let’s look at the averages first.

The table below summarizes the landscape of the U.S. economy Typical valuation ranges you are likely to encounter are presented on the bottom row.

Breakdown of U.S. economy by company size

These multiple ranges are not hard-and-fast. If yours is a small, owner-operated company, your business broker will develop an EV / SDE multiple range from industry databases. These will generally reflect the predilections of buyers seeking to step into your shoes and run the business themselves after taking it over, but it can also reflect purchases by buyers with more strategic intentions.

The middle market spans a wide range of degrees of business maturity and financial controls, and the range of multiples encountered there reflects this. In the lower middle market (LMM), EV / EBIDTA multiples differ widely between industries and segments, and they also vary due to company-specific factors. The table below, for instance, summarizes sales of 145 tech companies in the LMM. The bottom row indicates that, overall, tech companies sold at an average EBIDA multiple of around 8x, but the standard deviation in the sample was almost 3x. This means that about 95% of companies sold at multiples between 5x and 11x EBITDA, and the remaining 5% were outliers that sold at multiples below or above that range.

Tech company EBITDA multiples by transaction size, averages and variability

source: GF Data Resources

Looking more closely at the body of the table shows that multiples for LMM tech companies tend to rise as transaction size increased. By now, this shouldn’t surprise you. Also not surprising is the fact that this holds more broadly too, as the next table demonstrates. The table below summarizes 2,085 transactions across all industries in the LMM over a 16-year period. The larger companies get, the greater the buyer demand for them is, and the more acquirers are willing to pay for them. In 2023, the multiples on transactions in the $25-$50 million EV range averaged more than a full turn higher than companies in the $10-$25 million EV range, and multiples on transactions in the next EV stratum, ($50-$100 million) averaged nearly a full turn higher still. The average multiple on transactions between $100 and $500 million was nearly two full turns higher than for the average sale in the $50-$100 million EV category.

Average EBITDA multiples by transaction size and year

source: GF Data Resources

In addition to the stratification of LMM EBITDA multiples by transaction size, a related phenomenon is that the average LMM multiple has risen from 5.8x in 2003 to 7.1x in 2023. A deeper dive into both developments reveals the reasons, and the implications for business owners not only as they market their companies for sale to the right buyers in the near term, but also in making long-term decisions about positioning their companies for exit.

Over the past two decades, the major sources of demand—strategic corporate buyers and private equity groups (PEGs)—both with considerable capital to invest, have moved further down market in their hunt for growth. Large acquisition candidates can move the needle further and faster. But this low-hanging fruit is increasingly rare, and this is reflected in the higher multiples at which they sell. As corporate acquirers look for opportunities further on the smaller end of the middle market continuum, PEGs have developed a strategy that allows them to operate much the way large corporate buyers do: the add-on, or bolt-on strategy. This strategy brings PEGs, traditionally considered financial buyers, a kind of hybrid status between that of a financial buyer and a strategic buyer. With the add-on strategy, the PEG acquires a company with revenue and profitability critical mass and strong people, processes, and systems to serve as the core of the fund’s investment in an industry. This portfolio acquisition is known as a platform company, and with the PEG’s oversight, the portfolio’s systems, processes, and personnel are strengthened further. The PEG then supports the platform company’s acquisition of smaller portfolio companies, called add-on companies. Add-ons are not large or mature enough to be high ROI acquisitions as standalone investments, but they allow the platform company to achieve inorganic growth. The add-on strategy has made attractive acquisition candidates out of many LMM companies, even if they are not viable platform companies. According to PitchBook, add-ons rose from 60.3% of all PEG buyouts in 2014 (2,082 add-ons vs. 1,371 other) to 75.4% in 2023 (4,864 add-ons vs. 1,589 other).

Financial buyers like PEGs comprise just one of the three broad exit channels; strategic buyers like competitors and related buyers like family and management are viable exit channels too. Which buyer type makes sense for you depends largely on the company itself and your financial and non-financial objectives. But considering the importance of LMM companies to the popular PEG add-on strategy, it is worth taking a closer look at average multiples for both types of companies within that universe. In the table below, 112 PEG buyouts were broken down into platforms and add-ons and stratified by transaction size. As with the data considered previously, the average transaction price multiples rise directly with transaction size. And as you might expect, companies with the right success factors to serve as platforms sell at higher multiples overall. But a closer look at the body of the table reveals that this is driven by transactions of $50 million and higher; in transactions below $50 million, companies are actually valued at higher multiples if they are acquired as add-ons than if they are put in place as platform companies. Clearly, how your company fits into the buyer’s plans impacts the price you’ll be able to get.

Average EBITDA multiples by transaction size, platforms vs. add-ons

source: GF Data Resources

Conclusions

So how can you make use of these insights? If you have a longer exit timetable or are willing to extend your holding period to optimize your outcome, set and pursue realistic growth and structural improvement targets that are consistent with your goal.

Exit Channel Matters

Different buyer types will value different things, so thinking about your exit channel early can bring focus to your long-term exit strategy and ensure you are applying effort and resources toward productive ends. You can’t control external value drivers, such as the economy, interest rates, industry dynamics, market demand, and the competition. But you can give thought to the internal value drivers you can control. These include the basics such as size, margins, and growth rate. But they also include those that reduce risk and solidify your sustainable competitive advantage, such as locations and geographic coverage, customer diversification, vendor relationships, R&D, management, sales force, employee mix, and systems. Focus on the ones that increase value for your likely exit channel.

Value drivers for add-ons include sales growth, market share, profitability, unique products and processes, and product R&D. If you want to fit into a PEG’s add-on strategy, focus on building top-line sales and bottom-line profitability to make the company a highly attractive bolt-on. If your timetable allows, consider achieving that growth while investing in the people, systems, and improvements that will make the company a viable platform company.

Earnings Multiple Arbitrage: 1 + 1 > 2

Large public corporations are heavily reliant on inorganic growth, an avenue that allows them to create considerable shareholder wealth through a mechanism called multiple arbitrage. Although the biggest bang per transaction comes from deploying this strategy with upper middle market (UMM) targets, that low-hanging fruit has become increasingly scarce, and strategics have been more than willing to hunt for opportunities in the mid middle market (MMM) and the LMM. Understanding how they approach purchase decisions is important to negotiating price with them.

To begin with, the management and board of a public company are deeply concerned with the stability and level of their company’s earnings and it’s stock’s trading price, which condense down to the company’s PE ratio. PE reflects the shareholder value that management is creating/maintaining on the company’s earnings. Leadership is sensitive to drops in the company’s PE—especially relative to the PE of the company’s peers, sector, and the broader equity market—because these reflect an unfavorable change in the market’s confidence in the company and its management.

There are many reasons for buyers to acquire target companies, but in the simplest scenario, they are buying the target’s earnings. Using a common multiple basis (net income, EBIT, EBITDA), earnings arbitrage is straightforward: As long as

1. the purchase price (including transaction costs) is a lower multiple of the target’s earnings than the multiple at which the market values the buyer’s pre-transaction earnings,
2. the buyer maintains the aggregate earnings level of the combined entity and a combined earnings growth rate at least as high as the acquirer’s pre-transaction rate of earnings growth, and
3. the market continues to value the acquirer’s combined earnings at least as high as the acquirer’s pre-transaction PE ratio,

then the transaction will have a sustained accretive impact on the buyer’s stock price. The critical insight here is that management can create value for its shareholders just by conferring its higher PE ratio onto the earnings of the target.

This framework holds for transactions at any multiple lower than that of the acquirer, but strategics will still seek to squeeze the greatest possible value out of the strategy for themselves by paying the lowest multiples they can for acquisitions. They have several things going for them in this regard. First, many strategics are serial acquirers that maintain permanent corporate development teams. On the whole, their experience and advisory resources greatly outstrips that of their counterparts on the sell side. Also, they are well aware of the seven arguments for the dichotomy in earnings multiples between the public and private markets considered earlier in this article. Furthermore, although the markets they face for targets actively marketed by their transaction advisors are competitive, there is some game theory in play as well: the overall interests of the principal buyer universe—strategics and PEGs—are not served by inflating multiples to the maximum they can bear. And finally, they know that, but for their magical ability as public companies to transform the multiples on middle market income simply by buying it, the multiples sellers could get from other buyers would be lower.

Strategics temper their bids with this perspective. The multiples on LMM transactions are rising but still reflect considerable daylight between valuation on LMM vs. large companies. This mixed picture demonstrates both that strategic buyers are looking to the LMM with increasing interest as fuel for their shareholder wealth creation strategies, but also that they are largely successful in keeping prices muted. But the right advisor can push back by:

• Tailoring the marketing process. If it makes sense for your company, the marketing process can be designed to attract corporate buyers. And giving them a head start over the faster-moving PEGs can ensure their interest gets considered and help keep the process competitive.

• Preparing a comprehensive valuation analysis. This is often referred to as a “football field.” It develops a valuation range using a variety of approaches that includes not only CTA but also CCA with public company comps (even if it uses much larger comps than the target) and DCF analysis on your forecast performance. Sharing a valuation analysis that supports a range above a corporate buyer’s bid can demonstrate that you have done your homework and will support efforts to negotiate a higher price.

• Conducting value accretion analysis on public buyers. Buyer-specific accretion analysis for those that submit IOIs, when used in concert with your football field, can demonstrate that the price you are asking still leaves plenty of meat on the bone for the buyer. When added to the football field, value accretion analysis gives you the opportunity to turn the tables on the “separate multiples for separate markets” argument. It demonstrates that although the public and private markets are quite different, the fact that corporate buyers bridge it so nicely directly drives your preference for courting a public buyer as a means of getting the best exit price. Being able to highlight how the asking price falls within the buyer’s acquisition policy enhances your position. Public companies are not required to have or disclose firm acquisition policies to which they hold themselves, but they may reveal their philosophies and thresholds in their 10-Ks as well as when providing disclosure on individual transactions in proxy statements and S-4s. A well-constructed report that combines valuation analysis and accretion analysis can not only aid negotiation with a strategic buyer’s corporate development team, but it can also help them obtain board approval if the transaction is large enough to require it.

If you are intent on exiting your business in the near term, be prepared for your company to sell at a transaction multiple that reflects many factors, including size and exit channel. As a seller, you need to understand how to compute the appropriate earnings metric for valuing your business, and whether it supports the price you are seeking. Check out the links below for calculating your business’s Adjusted EBITDA and/or SDE, coming up with initial valuation estimates for your business, and evaluating the reasonableness of your desired selling price.

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