Owners usually ask this question at a turning point: an investor is interested, a partner wants to exit, a buyer has made an approach, or the bank wants to understand the business before lending. In each case, the answer shapes a negotiation. An owner who arrives with an unsupported figure gives the other side the opportunity to set the terms.
A valuation is not a fact about the business. It is a reasoned estimate, and its strength depends on the method, the inputs, and how well the assumptions can be defended.
Start with earnings that reflect the real business
Most private company valuations begin with EBITDA: earnings before interest, tax, depreciation, and amortization. It approximates the cash the operations generate before financing and accounting choices.
Reported EBITDA is rarely the right starting point. Private companies carry costs and income that a new owner would not. Adjusting for them is called normalization, and it often changes the value more than any other step. Typical adjustments include:
- Owner salaries above or below what a hired manager would be paid
- One-off costs such as a legal dispute, a relocation, or a system implementation
- Related-party rent or fees that are not at market rates
- Personal expenses run through the business
- Non-recurring income such as a one-time contract or asset sale
Every adjustment needs evidence. Buyers and investors will accept a well-documented adjustment and reject one that looks convenient.
Normalized earnings are the foundation. A strong method applied to the wrong earnings produces a precise but wrong answer.
Three methods, one range
The EBITDA multiple. Normalized EBITDA is multiplied by a multiple drawn from comparable businesses. The multiple reflects sector, size, growth, margin stability, customer concentration, and risk. Smaller private companies generally attract lower multiples than large listed ones, because of higher risk and lower liquidity. This is the method most buyers use first.
Discounted cash flow (DCF). Future free cash flows are forecast, typically for five years, and discounted back to today at a rate that reflects the risk of achieving them. A terminal value captures the years beyond the forecast. DCF is the most rigorous method and the most sensitive to assumptions: small changes in the growth rate or discount rate move the result significantly.
Comparable transactions. Prices paid for similar businesses in recent transactions, expressed as multiples of revenue or EBITDA. This method anchors the valuation in what buyers have actually paid. Its limitation is data: private transaction details are often incomplete.
| Method | Strength | Watch for |
|---|---|---|
| EBITDA multiple | Simple, widely used by buyers | Choice of multiple, quality of normalized EBITDA |
| Discounted cash flow | Reflects the specific business and its plan | Sensitivity to growth and discount rate assumptions |
| Comparable transactions | Grounded in real prices paid | Limited and imperfect data on private deals |
Each method has a weakness, which is why a credible valuation uses more than one. Where the methods converge, confidence in the range increases. Where they diverge, the difference itself is informative: it shows which assumptions drive the value.
Enterprise value and equity value
The methods above produce enterprise value: the value of the operating business. What the shareholders receive is equity value, which is enterprise value less net debt, adjusted for items such as working capital requirements. Owners who confuse the two are often disappointed when a headline price turns into a smaller check.
An illustrative example
Consider a hypothetical services business. The figures below are illustrative only, chosen to show the mechanics, and are not market data.
| Step | USD thousands | Note |
|---|---|---|
| Reported EBITDA | 900 | From the audited accounts |
| Add back: one-off legal costs | 200 | Dispute settled, will not recur |
| Add back: owner salary above market | 100 | Owner paid more than a replacement manager |
| Normalized EBITDA | 1,200 | The base for the multiple |
| Enterprise value at 4x to 6x | 4,800 to 7,200 | Illustrative multiple range |
| Less: net debt | (1,000) | Bank loan less cash |
| Equity value | 3,800 to 6,200 | What shareholders receive |
Two points stand out. Normalization added a third to reported earnings, which at a five times multiple adds 1.5 million to the value. And net debt reduced the equity value by a fixed amount regardless of the multiple. Both effects are routinely underestimated by owners preparing for a negotiation.
A discounted cash flow and a set of comparable transactions would then test whether the four to six times range is reasonable for this specific business, given its growth, margins, and risk.
How the purpose changes the valuation
The same business can be valued differently depending on why the valuation is being prepared.
- A capital raise is negotiated around a pre-money value. The forecast and the use of proceeds carry significant weight, because investors are pricing the future the capital will create.
- A sale focuses on what a buyer will pay today for the earnings the business already produces. Normalized historical EBITDA and the quality of earnings dominate.
- A partner exit often requires a value both sides accept as fair. Transparency of method matters more than the result.
- Internal planning can use a lighter approach, but still benefits from normalized earnings and a clear view of what drives value.
Stating the purpose at the start keeps the analysis focused and prevents a valuation built for one context from being used in another.
Why a range, not a number
A single figure invites a single counterargument. A range, supported by sensitivity analysis that shows how value moves with growth, margin, and discount rate, shows that the valuation has been tested. It also gives the owner a defensible position for negotiation: a floor below which the business should not be sold, and a ceiling that requires a buyer to see specific upside.
A valuation earns its credibility from the assumptions it discloses, not from the number it reports.
What drives value up
- Recurring revenue under contract, rather than one-off sales
- Low customer concentration, with no single client dominating revenue
- Stable or improving margins over several years
- Clean, consistent financial records that make diligence straightforward
- A management team that can run the business without the owner
- A credible growth plan supported by evidence rather than ambition
Common mistakes owners make
- Using a multiple heard elsewhere. A multiple quoted for a large listed company, or for a business in a different sector, rarely applies to a smaller private company.
- Valuing revenue instead of earnings. Revenue multiples have a place in some sectors, but most buyers of established businesses price earnings and cash flow.
- Including the owner in the earnings. If the business depends on the owner to function, a buyer will either discount the value or require the owner to stay on.
- Forgetting debt and working capital. The headline enterprise value is not the amount the owner receives.
- Treating the forecast as fact. A forecast is a set of assumptions. A buyer will test each one, and value the business on the assumptions they accept.
Before you name a figure
Collect three years of financial statements and current-year management accounts. List every item that would not continue under a new owner, with evidence. Decide what the valuation is for: a raise, a sale, a partner exit, or internal planning, because the purpose shapes the method and the level of detail required.
With that in place, the answer to "how much is my business worth?" becomes a range you can explain line by line, which is the only kind of answer that holds up in a negotiation.