Business Valuation Explained: How Buyers Value Your Company (and How to Increase It)
Business Valuation Explained: How Buyers Value Your Company (and How to Increase It)
If you’ve ever wondered, “What is my business really worth?”—you’re not alone. Business valuation is one of the most common questions we get from entrepreneurs preparing to sell their business.
Your company’s valuation determines not just the sale price, but also the quality of buyers you’ll attract, the deal terms on the table, and the wealth you walk away with.
In this guide, we’ll break down how buyers value companies, what multiples really mean, and how you can increase your business’s worth before selling.
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Valuation drivers by business model
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What Is Business Valuation (and Why It Matters for Sellers)?
Business valuation is the process of estimating how much a company is worth today, based on its ability to generate profits, growth potential, and the overall risk profile for a buyer.
For owners, knowing your valuation matters because:
It sets realistic expectations for a sale.
It attracts the right type of buyers (private equity, strategic acquirers, or search funds).
It guides your preparation strategy—whether to clean up financials, boost margins, or reduce owner dependence.
Bottom line: not understanding your company's valuation before you enter the market puts you at a significant disadvantage when negotiating with buyers.
The Most Common Valuation Methods
While every business is unique, buyers typically rely on these main methods:
EBITDA Multiple (Most Common in $2M–$20M Revenue Range)
Formula: EBITDA × Market Multiple
Example: $1M EBITDA × 5 = $5M valuation.
This is like valuing your business based on its yearly profit, then multiplying it by a number (usually 3-5x) that reflects how attractive your business is to buyers. This is not exactly how it works, however, think of it as paying a certain number of years' worth of profits upfront.
Multiples depend heavily on industry, size, growth, and buyer competition.
Discounted Cash Flow (DCF)
Projects future cash flows and discounts them to present value.
This method estimates how much money your business will generate over the next 5-10 years, then calculates what that future money is worth today. It's like asking: "If I were guaranteed to receive $100,000 per year for the next 5 years, how much would I pay for that right now?"
This methodology is typically applied to large public companies where it is easier to estimate annual growth rates. The DCF method often is overkill for small business valuation, resulting in inflated values.
Asset-Based Valuations
Based on the value of tangible and intangible assets (equipment, IP, contracts).
This approach simply adds up everything your business owns (equipment, property, inventory) and subtracts what it owes (loans, payables). It answers: "What would we get if we sold everything the business owns piece by piece?"
More common in capital-intensive businesses.
Revenue Multiples (Smaller Firms / SaaS)
Instead of using profit, this method multiplies your annual revenue by a factor (typically 1-2× for software businesses or 0.5-0.8× for service businesses like wealth management or accounting).
This works well for businesses that are investing heavily in growth and may not be profitable yet, but have predictable, recurring revenue (early stage software).
It also is used in industries with very standardized operating expenses, such as accounting firms, where the buyer is likely within the same industry (and they will know how much profit they can extract from each incremental $1 of revenue).
Understanding EBITDA (The Core of Most Valuations)
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Why it matters:
It provides a standardized view of operational performance by focusing on earnings from core business activities, helping buyers see the true earning potential regardless of tax strategies.
Buyers use EBITDA to compare companies across industries on a level playing field.
Fundamental framework: Remember that every $1 of EBITDA you produce in your business can translate into $3–$6 (or more) in exit value.
Valuation Benchmarks by Sector
Here’s a breakdown of common multiples across industries we serve. Use this as a rule-of-thumb, not a final verdict.
Want to know the standard metrics for your industry? Check out the following guides:
How to Increase Your Valuation Before Selling
Smart preparation can move you from a 3× multiple to a 6× multiple—or more. Focus on:
Reduce Owner Dependence: Shift key roles to your team.
Improve Margins: Trim low-margin services, negotiate vendor contracts.
Build Recurring Revenue: Lock in long-term contracts or subscriptions.
Clean Financials: Upgrade to accountant-prepared statements.
The best entrepreneurs start planning their exit 5+ years in advance. We work with these entrepreneurs with our Exit Navigator program - starting with a FREE valuation. Book your discovery call to learn more HERE.
Valuation vs. Selling Price: What’s the Difference?
Your valuation is an estimate. The selling price is what the market actually pays.
Why they differ:
Buyer competition (multiple offers vs. single buyer).
Deal structure (cash at close vs. earnouts).
Market conditions (interest rates, consolidation trends).
This is where an M&A advisor adds value—running a competitive process can increase your exit by 25% or more.
Common Myths About Business Valuation
“Every business sells for 3–5× EBITDA.”
False—ranges vary from 1.5× to 20× depending on size, growth, and industry.
“EBITDA equals cash flow.”
Not true—CapEx and working capital adjustments matter.
“Revenue is the best measure of value.”
Profitability and margins matter more.
“Buyers will pay what I think it’s worth.”
Buyers pay what the market and competition dictate.
Ready to Find Out What Your Business Is Worth?
At Breakwater, we help entrepreneurs running $2M–$20M revenue businesses with $350K+ EBITDA maximize their exit outcomes.
📞 Schedule a confidential valuation assessment with our team HERE
FAQ: About Business Valuation
How much is a business worth with $1M EBITDA?
Typically $3M–$6M, depending on sector and buyer appetite.
How long does a valuation take?
A professional assessment can be done in 1–2 weeks; preparing for market takes longer.
Do buyers always pay the valuation price?
No—valuation is a benchmark. Final price depends on competition, terms, and due diligence findings.
What if I don’t want to sell right now?
Even better. Exit Navigator helps you prepare now so you can sell from a position of strength later.
How Do I Prepare My Business for Sale?
Strong preparation is the foundation of a successful exit. This includes having clean financials, updated contracts, and reducing any operational dependency on the owner. A well-prepared business is not only more attractive to buyers but also commands higher value.
What Industries Does Breakwater M&A Specialize In?
While industry-agnostic, we specialize in helping service-based and software businesses with $1M–$20M in revenue and strong profitability. These are typically founder-led businesses with clean operations and growth potential.
Can You Provide Detailed Case Studies of Similar Businesses?
Yes, we have a library of both public and private case studies. These highlight real-world examples of how we’ve helped businesses navigate successful exits. We’re happy to share examples tailored to your industry or deal size.
What Is Your Experience and Professional Background in M&A?
Since 2019, Breakwater has closed over 50 transactions representing more than $150 million in total deal value. Our team brings a mix of entrepreneurial and investment banking experience, giving us insight from both sides of the table.
How Do You Determine Business Valuation?
Valuation is primarily based on cash flow and profitability, with industry trends and business model playing important roles. Every business is different, and our team customizes valuation models to reflect your specific situation.
How Do You Identify and Approach Potential Buyers?
We use a proprietary buyer database along with advanced tools to identify and vet strategic, financial, and institutional buyers. We also research your competitive landscape to uncover high-value buyers who may not be actively in the market—but are a perfect fit.
What Is a Business Exit Strategy?
An exit strategy is a structured plan for transitioning ownership while maximizing value. We work with business owners to develop a strategy that aligns with personal and financial goals—whether that's retirement, a new venture, or something else.
What Are Common Mistakes When Selling a Business?
Common missteps include inadequate preparation, emotional decision-making, poor valuation assumptions, and revealing too much too soon to buyers. Our process is designed to avoid these pitfalls and keep deals on track.
How Do I Know If It's the Right Time to Sell My Business?
The “right time” is different for every founder. It’s often driven by personal readiness—retirement, burnout, or a shift in priorities—as well as market timing. We help you weigh those factors objectively and make an informed decision.
Does Breakwater M&A Provide Resources for First-Time Sellers?
Yes, we specialize in working with first-time sellers. We provide educational resources, step-by-step guidance, and a clear roadmap so you’re never in the dark throughout the M&A journey.
Related Reads:
How to Find the Right M&A Advisor
A step-by-step guide to choosing the right advisor to maximize value, reduce stress, and avoid costly mistakes.
How to Sell a Business with $500K in EBITDA or More
Learn how buyers assess profitability—and how to position your $5M+ revenue business for premium valuation.
The Million Dollar Exit Guide - Part 1
In this 6 part series, learn how to build your own million dollar exit with actionable steps you can take in planning the exit of your business (it’s never too early to exit plan).
📥 Want the Full Guide?
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