The short answer. A multiple of restated EBITDA. Restate three things: owner compensation to market rate (undermarking inflates reported EBITDA and buyers restate it down), one-time expenses that will not recur (add back), and owner-related discretionary spending (add back). The multiple comes from the market for your industry, size, and growth profile. Trades typically 2.0 to 3.5x. Professional services 3.0 to 5.0x. Distribution 3.5 to 5.5x. Manufacturing 3.5 to 6.0x.
The EBITDA Restatement
Reported EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization from the P&L. It is a starting point, not the final number.
Restate Owner Compensation to market. If you have been drawing $60,000 and market is $140,000, add $80,000 back into reported EBITDA. This is not a positive adjustment. It reduces the number that a buyer will apply the multiple to. If you have been drawing at or above market, no adjustment.
Add back one-time expenses. Legal fees for a specific matter, an equipment write-off, a bad debt that will not recur. These reduce reported EBITDA and are not part of the business's earning power going forward.
Add back owner discretionary spending. The vehicle expensed through the business. The wife on payroll doing minimal work. The personal insurance line. A rational buyer will not carry these expenses. They come back to EBITDA for valuation purposes.
The net of these three restatements is the number the multiple applies to.
The Multiple
The multiple comes from the market. It reflects industry, size, growth trajectory, customer concentration, key-person risk, and margin quality.
Trades (HVAC, plumbing, electrical, construction). Typically 2.0 to 3.5x EBITDA. Higher for larger businesses with less owner dependence. Lower for owner-operated shops under $1 million EBITDA.
Professional services (consulting, legal, accounting, marketing). Typically 3.0 to 5.0x EBITDA. Higher for firms with contracted recurring revenue. Lower for hourly-billing firms.
Distribution and wholesale. Typically 3.5 to 5.5x EBITDA. Higher for exclusive distribution rights or franchised territories.
Manufacturing. Typically 3.5 to 6.0x EBITDA. Higher for specialty or defensible product lines.
Above the range: strong growth (double digits year-over-year), diverse customer base (no customer over 15 percent), low key-person risk, above-industry margins.
Below the range: declining revenue, customer concentration (any customer over 25 percent), high key-person risk, weak margins.
Why This Matters Before You Are Ready To Sell
Value at sale is set by the last three years of restated EBITDA. If you plan to sell in three years, the numbers you produce this year and the next two years are what a buyer will pay a multiple on.
The undermarking problem shows up here in dollars. Twelve years of drawing at $60,000 when market is $140,000 means twelve years of $80,000 phantom EBITDA. If sale timing catches years 10, 11, and 12, and the multiple is 3.0x, the phantom cost you $240,000 in sale value.
The auto shop field note is exactly this pattern.
Frequently Asked Questions
Should I get a certified valuation before selling?
Yes, ideally 12 to 24 months before intended sale. It reveals gaps that can be closed before the sale. A certified valuation done in the sale process is defensive. A certified valuation done well before is strategic.
What if my business is worth less than I need for retirement?
Then the retirement plan is not funded and the business's sale is not enough. Options: extend the working horizon, raise the sale value through operational improvements over the next 3 to 5 years, or fund retirement outside the business through additional owner contributions to a retirement account. Ignoring the gap does not solve it.
Are asset-based valuations relevant?
For most operating businesses, no. Asset-based valuations produce a floor (the business is worth at least the liquidation value of its assets) but the going concern value based on earnings is almost always higher. Use asset value only for businesses with minimal earning power.
What is a strategic buyer worth vs a financial buyer?
Strategic buyers can pay above the market multiple because they have synergies (cost savings, revenue expansion, market access) that financial buyers cannot capture. Strategic premiums typically run 10 to 40 percent above financial-buyer valuations.