The Million Dollar Business Exit Guide: Part 2
What Drives Business Valuation Before a Sale?
This is Part 2 of our Million Dollar Business Exit Guide - haven’t read Part 1? Check it out HERE.
If you're planning to sell your business in the next 1–5 years, here's the truth: buyers care about more than just your revenue—they want to see that your income is predictable, transferable, and scalable without you running the show.
Understanding what drives business valuation in the $2M–$20M range is crucial for maximizing your sale price and securing a deal that reflects your years of investment.
Let's explore the 7 key factors that determine your business's value to potential buyers.
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1. EBITDA: The Foundation of Valuation
Most companies in the lower middle market are valued as a multiple of EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s the cleanest metric for profitability and the starting point for buyers.
Typical Range:
3x–6x EBITDA for most businesses
7x–10x+ for strategic buyers or roll-up platforms
Example:
If your business earns $1M in EBITDA and sells for 5x, your valuation is $5M.
💡 Want to hit the top of that range? Attract strategic buyers who can eliminate redundancies or create cross-selling synergies.
2. Owner Involvement: Build Value Beyond Yourself
Here’s the deal: the more your business depends on you, the less a buyer will pay.
Signs of high owner involvement:
You’re the primary sales closer
You manage key customer relationships
You’re making most strategic decisions
How to fix it:
Build a strong management layer
Delegate core functions
Create documented SOPs
3. Revenue Quality: Predictability Pays
Buyers love stable, recurring revenue—and they pay more for it.
High-value revenue traits:
Subscription or membership models
Long-term customer contracts
High repeat purchase rates
Broad customer base (no heavy concentration)
💡 If 80% of your revenue comes from one client, expect a discount
4. Market Position: Own Your Niche
A business that dominates its market commands a premium. Stand out with:
Geographic expansion or exclusive territory
Niche specialization
High barriers to entry (e.g., licenses, proprietary processes)
The stronger your moat, the higher your multiple.
5. Systems & Technology Infrastructure
Buyers value businesses that are modern, efficient, and scalable.
Must-haves:
Cloud-based accounting (QuickBooks, Xero, etc.)
CRM and marketing automation
Real-time financial dashboards
Digital invoicing, inventory, and workflow systems
⚙️ Operational sophistication signals that the business is ready to grow post-sale.
6. People & Talent: Teams Drive Value
Your team is one of your biggest assets—and your buyers know it.
What boosts valuation:
Low turnover
Key employees under contract
Documented training and onboarding
Clear org chart and leadership succession
❗ Avoid tipping off staff prematurely—consult your M&A advisor before any retention discussions.
7. Brand, Reputation & Digital Presence
Yes, buyers will Google you—and your digital footprint matters.
Intangible factors that boost value:
5-star online reviews
Professional, mobile-optimized website
Clear brand messaging and USP
Strong social media presence
Consistent content strategy
💬 Perception is reality. Make sure yours reflects a business worth buying.
Fast Track: What to Prioritize Based on Your Timeline
If you're planning to sell in 12 months or less:
Lock in customer contracts
Confirm lease transferability
Get a Quality of Earnings (QoE) report
Polish brand and online reputation
If you're selling in 1–5 years:
Hire or train a general manager
Increase EBITDA and growth
Implement tax-advantaged structures (e.g., family trust)
Strengthen your recurring revenue model
Valuation Rules of Thumb (The “Gold Standards”)
Buyers use simple benchmarks to size up a business quickly. Make sure you’re within these healthy ranges:
📌 Final Takeaway: Valuation is the First Step to a Strategic Exit
Understanding the value drivers behind your business empowers you to make changes that meaningfully increase your sale price.
But remember: valuation is only half the equation. How you structure the deal determines how much of that value you actually take home.
In the next chapter of The Million Dollar Business Exit Guide, we’ll explore asset vs. share sales, tax strategy, and how to structure a win-win exit.
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