Practical M&A Guides · Concept 01 of 15
How buyers value a private company.
Owners often expect one number. Buyers work from several lenses at once, reconcile them, and then apply judgment. Understanding which lens applies to your business is the first step toward a defensible range.
How Buyers Value a Private Company
No single method determines value.
Buyers reconcile several lenses, then apply judgment to the evidence in front of them.
Earnings multiple
Adjusted EBITDA × selected multiple
Often used for profitable operating businesses.
Revenue multiple
Revenue × selected multiple
May help when current earnings are not representative.
Discounted cash flow
Present value of expected future cash flows
Highly sensitive to forecasts and discount rates.
Precedent transactions
Prices paid for relevant businesses
Size, timing, sector, and structure affect comparability.
Asset approach
Fair value of assets less liabilities
Often more relevant for asset-intensive businesses.
Illustrative example
$2.0MAdjusted EBITDA 7.0xSelected multiple $14.0MEnterprise valueA valuation range requires both market evidence and professional judgment.
Growth, margins, recurring revenue, customer concentration, management depth, risk, market conditions, and buyer strategy can all affect the range. The example above is arithmetic only; it is not a market benchmark and it is not a valuation of any business.
Which lens applies to you
For an established, profitable operating business in the lower middle market, the earnings multiple does most of the work. It is the closest widely understood proxy for the cash flow a buyer is actually purchasing, and it is the figure lenders underwrite against.
A revenue multiple becomes relevant when current earnings are not representative: a business reinvesting heavily for growth, a subscription software company, or a company in a year distorted by an unusual event. It is a blunter instrument, and the resulting range is wider.
Discounted cash flow is the most theoretically complete method and the most sensitive to assumptions. Small changes in the forecast or the discount rate move the answer substantially, which is why it usually informs a range rather than setting one in private transactions.
Precedent transactions carry real weight when genuinely comparable deals exist. The difficulty is that comparability is demanding: size, sector, timing, growth profile, and deal structure all have to line up before a precedent tells you much.
The asset approach matters most where the assets themselves carry the value: real-estate-heavy businesses, equipment-intensive operations, or a company whose earnings do not justify a going-concern premium.
Why buyers reconcile rather than average
Mechanically averaging unrelated methods produces a number with no owner. A disciplined analysis weights the method best supported by the evidence, uses the others to test whether the conclusion is plausible, and states plainly which inputs would change the answer. That is what separates a range you can defend in a negotiation from one that collapses under the first serious question.
Next step
Review a range with Michael
A tailored review tests which method applies, which earnings figure survives scrutiny, and what the range means for your objectives.