What’s Your Business Really Worth?

A Clear Look at Valuation for Middle-Market Owners

You’ve spent decades building your business; navigating recessions, creating jobs, and reinvesting earnings to build something that lasts. When it comes time to sell, the valuation you receive isn’t just a number on a page. It shapes your retirement, your family’s future, your employees’ livelihood, and your long-term legacy.

Unfortunately, many business owners misunderstand what truly drives valuation, and those misperceptions can cost them, often dearly.

Valuation Isn’t Just a Multiple

You’ve probably heard the refrain: “Businesses like yours sell for 4–5x EBITDA.” While that shorthand is common, it oversimplifies a more nuanced reality. Value isn’t a fixed multiple; it’s a function of return and risk:

Value = Expected Future Cash Flows ÷ Required Rate of Return

Buyers aren’t buying history; they’re buying a future stream of earnings. Like a homebuyer looking beyond the current paint color, investors assess what your business can produce going forward and how much risk they’ll assume to get it.

Most middle-market deals rely on the income approach—valuing a company based on projected cash flows, adjusted for perceived risk. The asset and market approaches may apply in specific situations, but for healthy, cash-generating businesses, the income approach tends to lead the way.

Same EBITDA, Different Outcomes

Let’s look at two companies, each reporting $800,000 in EBITDA:

Why the difference? One requires significant ongoing capital investment, while the other operates lean. Free cash flow, the money left over after reinvestment, is ultimately what buyers are looking for.

Assuming both buyers require a 17.4% return:

• Excavator: $350,000 ÷ 17.4% = $2.01M → 2.5x EBITDA
• HVAC: $500,000 ÷ 17.4% = $2.87M → 3.6x EBITDA

Same EBITDA. Different values. The distinction lies in cash flow quality and reinvestment needs.

Understanding Buyer Risk and Return Expectations

Buyer return expectations drive valuation. Consider two potential acquirers:

• Buyer A demands a 25% return—typical of high-risk or smaller deals.
• Buyer B, a strategic acquirer with lower capital costs and potential synergies, is satisfied with a 13% return.

Buyer B can, and likely will, pay significantly more for the same cash flow.

Buyers assess required returns using what’s called a build-up method, factoring in:

• Economic and industry volatility
• Size and scale of the business
• Customer or supplier concentration
• Depth of management
• Geographic exposure
• Dependency on the owner

Most middle-market businesses fall in the 20–25% required return range. Well-run, transferable businesses with low risk may fall below. Startups and distressed assets fall above.

The Capital Stack: What You Actually Get Paid

Let’s revisit our $2.87M example. Even if that’s the agreed-upon price, the check you receive won’t come from one pocket.

Buyers finance deals using a capital stack:

The higher the price, the more equity (or seller financing) is required. Push valuation too far, and deals can fall apart—often late in the process.

Emotional Pitfalls: Bad Benchmarks, Unrealistic Expectations

Too many owners set expectations based on secondhand stories:

• “My friend sold for 5x EBITDA.”
• “My accountant said it’s worth $3 million.”
• “The market’s hot—I should get top dollar.”

But these statements often ignore critical risk factors—like concentration issues, weak financial systems, or management dependency. Worse, some owners agree to seller-heavy financing structures without understanding the implications—only to face defaults and legal disputes later.

Why Strategic and PE Buyers Often Pay More

Let’s say your business generates $2M in free cash flow. Depending on the buyer type, the valuation may look like this:

Why the difference? Private equity buyers use more leverage, while strategic acquirers benefit from synergies—cost savings or revenue enhancements from combining operations. When your business aligns with their strategy, they can justify higher prices.

What Makes a Business Valuable?

Here’s what buyers look for:

• Consistent, verifiable cash flows
• Low concentration risk: no single customer, supplier, or region dominates
• Management depth beyond the owner
• Scalable operations that don’t require massive reinvestment

Ask yourself: If you stepped away tomorrow, would your business continue to thrive?

If the answer is yes, your business is transferable and more valuable.

Final Thought: Plan Early, Exit Smart

Valuation isn’t about chasing the highest multiple. It’s about achieving a successful outcome, whether that’s retirement, family succession, or scaling with new investors.

Start early. Shore up your financial reporting. Diversify your customer base. Build a leadership team. Understand who your likely buyers are and how they’ll view your business.

Ready to Learn Your Company's True Worth?

At Breneman Advisors, we specialize in helping owners navigate the complexities of business sales—from valuation to closing. Set up a call with our team to explore your options and learn how our valuation services can support your long-term goals. Get in touch.

Frequently Asked Questions About Business Valuation

What factors affect the value of a middle-market business?

Business value is driven by expected future cash flows and the perceived risk of achieving them. Key factors include financial performance, customer concentration, industry volatility, management depth, and owner dependency.

Is EBITDA the best way to value a business?

EBITDA is a starting point, but not the full picture. Buyers focus on free cash flow, capital reinvestment needs, and risk-adjusted returns. Two businesses with the same EBITDA can have very different valuations.

How do buyers calculate what they’re willing to pay?

Most buyers use an income approach, projecting future cash flows and discounting them based on required returns. These returns vary based on business risk, size, industry, and buyer type (e.g., private equity vs. strategic buyer).

Why do strategic buyers often pay more?

Strategic buyers can justify higher valuations due to cost-saving synergies, revenue enhancements, and lower capital costs. These advantages allow them to accept lower return thresholds, increasing what they can offer.

When should I start preparing my business for a sale?

Ideally, 1–3 years before a sale. Early planning allows time to improve financial reporting, reduce risk factors, strengthen leadership, and position your company for a smoother, higher-value exit.