Most founders find out how their business is actually valued during due diligence — which is the most expensive possible time to learn it. By then, a buyer's advisors have already built a model, and you're negotiating from their numbers, not yours.
A credible valuation, done before you go to market, does two things: it gives you a defensible number to negotiate from, and it flags the adjustments that need explaining before a buyer's due diligence team finds them and uses them against you.
Here's how that valuation actually gets built.
The three approaches buyers expect to see
Serious buyers — whether a strategic acquirer, a private equity fund, or a well-advised individual — rarely rely on a single method. They triangulate across three standard approaches and expect your numbers to hold up under each one.
1. Market approach (comparable multiples)
This values your business relative to what similar businesses have actually sold for or currently trade for. There are two common variants:
- Guideline public company method — applying trading multiples (commonly EV/EBITDA or EV/Revenue) from comparable listed companies, adjusted for size and liquidity differences.
- Precedent transaction method — looking at actual acquisition multiples paid for similar private businesses in your sector, which usually run higher than public trading multiples because they include a control premium.
For most small and mid-sized businesses, EV/EBITDA is the multiple buyers reach for first, because it strips out financing structure and tax position, making businesses easier to compare.
2. Income approach (discounted cash flow)
This values the business based on the cash it's expected to generate going forward, discounted back to today's value using a discount rate — usually a weighted average cost of capital (WACC) — that reflects the business's risk profile.
For smaller, owner-run businesses with fairly stable earnings, advisors often use a simpler variant: capitalization of earnings, which divides a single normalized earnings figure by a capitalization rate rather than projecting multiple years of cash flow. The full DCF tends to get used when a business has real growth trajectory or uneven cash flows that a single-year snapshot wouldn't capture fairly.
The income approach is the most sensitive to assumptions — growth rate, discount rate, and terminal value all move the number meaningfully, which is exactly why buyers stress-test it against the other two.
3. Asset approach (net asset value)
This values the business as the fair market value of its assets minus its liabilities. It's rarely the headline number for a healthy operating business, but it matters in two situations: as a floor value — no rational seller accepts less than what the assets alone are worth — and as the primary method for asset-heavy or capital-intensive businesses (real estate, equipment-heavy operations, holding companies) where earnings don't tell the full story.
Buyers use all three not because they expect identical answers, but because the gap between them tells its own story. A wide spread between the income approach and the market approach, for instance, often signals that growth assumptions are too aggressive — or that comparable multiples don't fit your business as well as you think.
The adjustments most founders forget to make
This is where deals lose momentum — and where sellers leave money on the table. Reported earnings on a founder-run business almost never reflect what the business would earn under new ownership, and buyers know it. The process of correcting for this is called normalization, and it's usually where the real negotiation happens.
Owner's compensation. If you're paying yourself below (or above) what it would cost to hire a professional manager to do your job, that gap needs to be added back or deducted. Buyers will do this calculation themselves if you don't.
Personal expenses run through the business. Vehicles, travel, family members on payroll who don't work in the business, memberships — common in owner-run companies, and buyers will ask for every one of them to be itemized and added back with supporting documentation, not just claimed.
One-time and non-recurring items. A lawsuit settlement, a bad debt write-off, a one-off consulting windfall, COVID-era relief — these distort a "normal" earnings year in either direction and need to be pulled out so the buyer is valuing ongoing operations, not a single unusual year.
Related-party transactions. Below-market (or above-market) rent paid to a property you or a family member owns is one of the most common adjustments missed. Buyers will re-price it to market rate, which can materially change EBITDA.
Non-operating assets. Investment portfolios, property not used in operations, or a company car with no business purpose sit on the balance sheet but aren't part of what's generating the earnings being valued — they get carved out and valued (or excluded) separately.
Working capital normalization. Most deals are structured around a "normal" level of working capital being delivered at closing. If your receivables, payables, or inventory levels are unusually high or low relative to a typical operating cycle, that difference becomes a purchase price adjustment — one that founders are frequently surprised by late in the process.
Deferred reinvestment. If capital expenditure has been deferred to flatter recent profit — equipment running past its useful life, deferred maintenance, an overdue systems upgrade — a buyer's advisors will estimate the catch-up cost and factor it into their offer.
Concentration and dependency risk. These don't change historical earnings, but they affect the multiple a buyer is willing to pay. A business reliant on one or two customers for a large share of revenue, or entirely dependent on the founder's personal relationships, is priced at a discount to an otherwise identical business without that risk.
Why this matters before you're in a deal
None of this is about inflating your number — a valuation a buyer's diligence team dismantles in week three of exclusivity is worse than no valuation at all. It's about knowing your defensible range across all three approaches, and having every adjustment already documented and explainable before someone else raises it first.
Founders who do this work early tend to negotiate from a position of "here's how we got to this number" rather than reacting to a buyer's opening offer. That difference alone often outweighs the cost of getting the valuation done properly in the first place.
Strategic Advisors Pvt. Ltd. provides valuation and sell-side advisory for founders preparing to exit, backed by a Chartered-Accountant-led team that runs the numbers, the normalization, and the negotiation from one desk. Book a free first call →