Buying a Business: How Do You Know What It’s Worth?
14 September 2026
You’ve found a business you like. The industry fits your experience, the location works, the company appears profitable and you can see yourself owning it.
Now comes one of the most important questions you’ll face as a buyer:
What’s the business actually worth?
Notice that this is a different question from, “What is the seller asking?”
The asking price is simply what the seller hopes to receive. Your job as a buyer is to determine what the business is worth based on its earnings, risk, future prospects and the return it can reasonably provide on your investment.
Start With the Earnings
For most small and lower-middle-market businesses – businesses with valuations of $500,000 – $25 million – value starts with earnings.
But don’t simply look at the net income shown on the tax return or profit and loss statement. Privately held businesses are often operated to keep taxes at a minimum and often there are expenses shown on the financial statements that are really a benefit of ownership. A new owner may not incur some of these expenses.
The process of recasting—or normalizing—the financial statements attempts to determine the business’s true earning power – the REAL economic benefit to an owner. The “profit” shown on the P&Ls or the taxable income shown on the tax returns, is rarely a true representation of what the business actually makes.
Depending on the size of the business, the result of this recasting process may be expressed as Seller’s Discretionary Earnings (SDE), Discretionary Earnings (DE) or EBITDA (earnings before interest, taxes, depreciation and amortization).
We offer a comprehensive coaching program – both group and 1:1 options – in The Brokers Roundtable℠, our online support platform tailored for business owners, business brokers, Realtors, buyers and anyone else interested in valuing, buying or selling a business.
You’ll want several years of financial statements and tax returns so you can identify trends and verify that the earnings being represented are real.
And remember: every adjustment should be explainable and supportable.
Apply the Right Multiple
Once you’ve determined normalized earnings, the next question is what multiple those earnings deserve.
A business producing $1 million of normalized (recast) annual earnings is not automatically worth $3 million, $4 million or $5 million. The appropriate multiple depends on the characteristics and risks of that particular business.
Among the factors that can influence the multiple are:
-
- Revenue and earnings trends
- Customer concentration
- Dependence on the owner
- Quality of management
- Recurring versus one-time revenue
- Condition of equipment and facilities
- Competitive position
- Industry outlook
- Transferability of customer and supplier relationships
Generally, the lower the perceived risk and the greater the likelihood that earnings will continue after the sale, the stronger the multiple.
Look Forward, Not Just Backward
Historical earnings establish a record, but you’re not buying the past. You’re buying the future.
Study sales trends, margins, existing contracts, customer retention and the company’s pipeline. Ask what is likely to happen to earnings after the current owner leaves.
Our video, on how the value of a business’ assets might add to the value of a business, is HERE on our YouTube channel.
A company showing $800,000 of earnings today may be worth more than one earning $1 million if the first is growing rapidly while the second is losing customers and declining.
The question isn’t simply, “What did this company earn?”
It’s “What can I reasonably expect it to earn under my ownership?”
Check the Market
Next, look at what buyers have paid for comparable businesses.
This is the market approach to valuation. If similar companies have consistently sold within a certain range of multiples, that’s important evidence of what the market is willing to pay.
But comparable transactions aren’t interchangeable. Two companies with identical revenue and earnings can have dramatically different values because their risks, growth prospects and management structures differ.
Market data is evidence—not a substitute for analysis.
Remember: You Have Alternatives
This is where buyers sometimes get into trouble.
After months of searching, negotiations and due diligence, it’s easy to become emotionally attached to a deal. You start picturing yourself owning the company. You’ve spent money on attorneys and accountants. You’ve invested enormous time.
And suddenly you feel you have to close.
You don’t.
___________________________________________________________________________________________________
Our 14-part series of video shorts, How to Buy a Business, is available here.
The Principle of Alternatives reminds us that there are other businesses and other places to invest your money.
The related Principle of Substitution asks a simple question: why pay more for this business if an equally attractive business producing a similar return can be purchased for less?
Keeping those principles in mind can prevent enthusiasm from turning into overpayment.
Don’t Forget Your Return
Finally, valuation has to make sense from the buyer’s perspective.
Suppose two businesses are similarly priced, but one is likely to produce a 15% return on your investment while another produces 25%, with comparable risk.
Which would you rather own?
Check out our video series, “How Much is My Business Worth“ on our YouTube channel.
Your acquisition also has to generate enough cash flow to service acquisition debt, fund necessary capital expenditures, provide adequate working capital, compensate you appropriately and still produce an acceptable return on your investment.
A business can have a perfectly reasonable market value and still be the wrong acquisition for you.
The Bottom Line
Never confuse price with value.
Determine normalized earnings. Apply an appropriate market multiple. Examine future earnings prospects. Compare the company with actual market transactions. Consider the risks. Calculate your expected return.
And always remember that you have alternatives. (See this Guide for First Time Buyers.)
Buying the right business at the wrong price can turn a great opportunity into a poor investment.
Before making an offer, know what the business is worth—and know what it’s worth to you.
“There are two types of people who will tell you that you cannot make a difference in this world: those who are afraid to try and those who are afraid you will succeed.”
– Ray Goforth
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively from now on.
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents
The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at
