Start With Profit, Not Sales
A company with $7 million in sales can sell for the same price as one with $3 million. What counts is what is left after the costs of running it. Buyers want to know how much, how reliable, and how many years of it they are paying for.
Recasting the Numbers
Your tax return shows what you reported, shaped by what saves you tax. A buyer wants normal earnings, so the broker recasts the profit and loss statement. The process is called adding back.
A legitimate add-back is a cost the next owner will not have, such as your above-market salary, a family member who is paid but does no work, or a one-time legal bill.
A bank loan's proceeds or the sale of an old truck is not income, and buyers catch it in review.
Owner draws are another trap. Money you moved to a personal account does not appear on the profit and loss statement, so it is not automatically cash flow.
A Worked Example
Suppose a Garner service company reports $310,000 in net profit. The owner draws a $120,000 salary, runs $18,000 of personal insurance through the business and had a one-time $12,000 equipment repair.
Adding those back gives $460,000 of discretionary earnings. At a multiple of about 2.5, the starting point is roughly $1.15 million. A buyer then adjusts for risk, and that is where most of the debate happens.
What Moves the Multiple
Most established companies in this size range sell for about two to three times yearly cash flow. Multiples are fairly stable over time, so waiting a year rarely lifts the figure. Improving the company does.
- Owner dependence: if customers call you personally, a buyer pays less
- Concentration: when three customers make up a fifth of revenue or more, expect a discount of about that size
- Trend: steady beats a sudden spike right before a sale
- Lease: a below-market rent looks like a perk to you and a cost to the buyer, who underwrites at market rate
SDE or EBITDA
Discretionary earnings suit companies where the owner works in the business. Once you have a manager and have stepped back, buyers use EBITDA, which counts a market salary for everyone. Both measures are fair; they answer different questions.
How the Price Gets Paid
The headline number is only part of it. Buyers often use an SBA loan, and lenders commonly want the seller to carry a note for part of the price. Some deals add an earnout that depends on keeping key customers.
Two offers of the same size can differ by hundreds of thousands in real value. Compare cash at closing, note terms, and what happens if a customer leaves.
Next Steps
The fastest way to anchor your own number is a broker who has sold similar companies. Start with a valuation check, or read the twelve month plan to see what could raise it. Industry specifics are in the industry playbooks.