The 8 Factors That Determine What Your Business Is Actually Worth | FBO2BO EP7

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Welcome to From Burnout to Bought Out, the podcast for business owners who are tired of being the hardest working, lowest paid employee in their own company. I’m Jon, joined as always by Ryan, and together we’ve spent years inside owner-run businesses helping founders go from running on fumes to running a business that actually runs without them.

Every episode, we break down the real problems nobody talks about—the burnout, the bottlenecks, the blind spots—and show you what it looks like to build a business that’s profitable, sellable, and doesn’t need you in the building every day to survive. Whether you’re grinding through a plateau, thinking about an exit, or just trying to take a vacation without your phone blowing up, you’re in the right place.

Let’s get into it.

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Jon: Okay, Ryan. Howdy.

Ryan: Howdy, Jon. How are things in yonder parts? Things are still chilly in my parts. Nothing like having chilly parts.

Jon: Yeah. Sorry to hear it, man. You know, it’s a drag living here too, where the temperature is the same every day of the year. It’s tough.

Ryan: Yeah. Well, I was only snickering a little bit because I got to see you this weekend. We were playing golf in 40-degree weather and I was okay. I don’t like the cold, but 40 degrees is not that cold. You were shivering in your shoes—in your golf sneakers.

Jon: I was in my five layers. I was freezing.

Ryan: But how’d that come out, Jon? Who won that match?

Jon: Were we scoring? I never score.

Ryan: It was evident that day. That’s the sign of a terrible golfer—when you never keep score. You don’t even bother.

Jon: Right. My mom used to have this beaded thing she wore around her waist, and every shot she’d yank on a bead or whatever. It went up to 15. So every time my mom shot under 10 on a hole, we celebrated.

Ryan: Wow. Okay. Well, I’m not quite the level of your mom’s golf then. I don’t think we hit 10 on any hole.

Jon: Well, with practice, you can get there. Hey, you know what? You get bang for your buck. You get value for money if you’re out there with more shots, right?

Ryan: That’s true. It’s counterintuitive. A lot of exercise.

Jon: Yeah, exactly. We did all right. There were a few good shots. That’s the first time I played this year, so there were a few straight ones. That was fun.

Ryan: Yeah. Good times.

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Jon: I’m excited about this episode. Episode seven. We’re talking about valuation of business. I think it’s a super interesting topic, and really it’s the purpose that we generally all go into business for. We want to make some money. We want to turn around and sell it. But yeah, I think this one will be interesting to a lot of people out there. A lot of owners are walking around with numbers in their head of what they think their business is worth, but they’re normally way off track. How far off are they usually when they come to thinking about the current valuation for their business?

Ryan: Wildly off, Jon. Their business isn’t worth nearly as much as they think it is, and we’ll get into why that is. My good friend and colleague Justin Goodbread wrote a book called Your Baby’s Ugly, and it’s about this topic itself. He has a podcast out there where I was actually on. So you can look at that podcast as well.

Jon: Were you the good-looking one or were you the ugly one?

Ryan: I was the ugly one again. You know, I’m used to it. I make other people look good, Jon. That’s my whole goal online.

Jon: Yeah. That’s my job.

Ryan: Exactly. So, everybody has a delusion of what their business is worth, right? They hear a number, they want a number, and the truth of the matter is it’s not worth what you think it is. And it’s not a rounding error. It’s a different ballgame. It’s a different league. It’s a different zip code. Sometimes it’s a different time zone from what people actually think it is.

So an owner will say, “Well, you know, I want $5 million,” but the market—a buyer—says it’s only worth two. And then the owner is offended. “What do you mean? My life’s work here, my blood, sweat, and tears building this thing up is only worth $2 million to someone else?”

We’re going to get into the topics of why that is and, more importantly, what you can do about it. But the problem is people have this number in their mind, and even when reality is staring them in the face, they’ve already spent the money on a lake house, on a boat. The difference between $2 million and $5 million is life-changing. There’s a huge difference having $3 million more in the bank.

Brokers are to blame, expectations are to blame, and unfortunately, reality is the truth.

Jon: Yeah. A little bit of delusion, right? If you’re pulling numbers out of thin air, they might make sense to you. It might be a bit of a wish or dream, but there’s actually a formula—and I think we’re going to get into the formula later on—for how you make these calculations.

You know, I worked for an agency owner, and he was doing $4 million, not making a ton of margin, but wouldn’t have sold for anything less than $20 million. That was a number in his head. And it just—it’s an inflated valuation that was not grounded in reality. So where does it come from? How do owners get there? Why is it so disconnected from reality?

Ryan: Well, there are three places, and all of them are pretty tragic, Jon.

First, they hear a story—whether it’s at a barbecue, a golf course, or whatnot—and one of their buddies sold for 6x. Six times is the multiple, and we’ll get into what that actually means. And now everything needs to sell for 6x, right? So that’s the expectation.

Now, what they didn’t know is that their buddy had substantial recurring revenue, 30% margins, and a team that ran without him. They didn’t hear that part. They just heard “6x.” And that was in between bites of a brisket sandwich or between golf swings. I really think that when buddies are telling their story, it should come with a surgeon general’s warning. That buddy at 6x is one of the very few that happens.

Second, they confuse revenue with value. So a $4 million ad agency with very little margins looking for $20 million—that’s 5x off of revenue. Buyers don’t care about revenue. They care about the bottom line. They care about consistency. They care about cash flow. Those are the things that matter, not revenue. Revenue hardly ever plays any part of the valuation.

Third, they want to charge a buyer for their suffering. They want to charge for the legacy that they built—15 years of sweat equity, missed birthdays, sleepless nights. A buyer doesn’t care about that. A buyer pays for the machine. Unfortunately, your blood, sweat, and tears don’t show up in the cap table.

And I’m going to give you a bonus. Number four is brokers. Brokers are the worst at valuing things. They want to get you top dollar—that’s the only reason they exist—so their fee gets top dollar. When you’re selling for $3 million and the broker has a 10% fee, that’s $300,000 to the broker for finding you a buyer. If it goes down to $2 million in reality, the broker loses $100,000. Their fee is now $200,000. So they’re always going to say, “Hey, I think you can get this, and we’ll see what happens.” But the market never lies. The market wants what it wants, and that’s the way it goes.

Jon: So it seems like it’s a mixture of poor education or information, delusion, and a little bit of emotional attachment to everything that’s been built up. And when you combine those things together, it gets crunched up into “Hey, $20 million, that’s my number”—which makes no sense to anybody except for the owner.

Ryan: Right. And then they’ll never realize it. You hold that number in your head and you never get there. It doesn’t become a sellable thing at that point.

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Jon: Let’s delve into the mechanics. How does a buyer actually determine what a business is worth? You and I have been through this process and we’re actively engaged looking at businesses. I find it super interesting. How does a buyer determine value?

Ryan: It’s a very boring answer. It’s a multiple of earnings.

Adjusted EBITDA × Multiple = Price

Adjusted EBITDA—you might have heard it as Seller’s Discretionary Earnings (SDE). Essentially, if my adjusted EBITDA is $1 million and I have a multiple of four, then that is $4 million. That’s the price of the company.

The multiple is where every dream is made and where every dream goes to die. So that $4 million in revenue with $1 million EBITDA—if he wants $20 million, that’s a multiple of 20. Nobody in their right mind is going to pay for that.

A $1 million to $10 million business typically will see between 2x and 5x as the multiple of adjusted EBITDA or SDE.

Jon: But that’s not a range. It’s a chasm. There’s a big difference.

Ryan: Right. If I have $500,000 of EBITDA and I have a 2x multiple, that’s a $1 million check. If I have a 5x multiple, that’s $2.5 million. That’s a difference of $1.5 million. It’s the same business on paper, but it’s a completely different outcome. We’re not buying a dinghy anymore—we’re buying a yacht.

I think the wrong question is “What’s my business worth?” The right question is “What’s my multiple, and how do I get it to increase?” How do I go from 2x to 4x? That could mean millions of dollars. That’s the lever almost nobody is pulling.

They’re too busy yanking on revenue, which, by the way, doesn’t move the needle. What moves the needle are gross profit margins, net profit margins, and recasted or adjusted EBITDA.

Jon: And that’s why we talked about revenue being a vanity metric a few episodes ago. It really is—revenue doesn’t account to a hill of beans when you’re actually turning around to sell your business.

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Jon: Let’s keep digging. What moves the multiple? What makes a buyer pay 4x versus 2x, for example?

Ryan: Well, I think there are eight factors. This is your sticky note material. Hopefully you re-listen to this podcast.

1. Owner Dependence

If your business cannot function without you, your multiple drops like a cinder block. A buyer is buying a business, not the privilege of having a job with overhead. And if everything depends on you, it’s extremely risky—and that lowers the multiple. Risk lowers the multiple every time. So we’ve got to get the business running without you, and that will increase your multiple significantly.

2. Revenue Concentration

If one or two clients represent 30% of your revenue because you’re doing business with your cousins, there’s a real risk there. That’s losing 30% of annual sales, which drags down your adjusted EBITDA. One client leaves and the whole thing falls apart like a poorly assembled IKEA bookshelf.

3. Recurring or Contractual Revenue

In construction, that would be called a backlog. But we also need revenue you can set your watch to. If 70% of the revenue lives there, you’re on a different planet. But if you’re starting at zero every single January, the multiple is not going to be there. We need predictability. Anything that is boring, predictable, and low risk is going to help increase your multiple.

Jon: So some of these projects—these high-earning projects where you have to bid via RFP and you’re going through that process over and over—that creates uncertainty in terms of income. Sometimes a business model where it’s simplified and it’s regular and recurring demonstrates the consistency you’re talking about.

Ryan: It does. But some of those RFPs might be for a five-year duration, so then it becomes recurring revenue. There is some good to that, folks. But if you’re constantly having to go out and get the next sale and get the next sale, you’re absolutely right, Jon—it’s going to lower your multiple.

4. Cash Flow Consistency

Jon: One more point there, because that goes back to the owner as well. A lot of the time it’s the owner going out and winning that business—either handshake deals or they’re the ones with the relationships. So you’ve got to think about that. If you’re removing yourself from the equation, how does a buyer coming in understand that they can count on that sales flow for continual ongoing revenue?

Ryan: Absolutely. We worked with one client who was very much owner-dependent, and we actually increased expenses by bringing in people to take away a lot of the tasks that owner was doing. We were reducing the owner dependency. We also made it a point to diversify the customer base. And when the person sold, it sold for 1.5x more than it would have just two years previous.

Jon: Worth the cash hit.

Ryan: Absolutely. The return on investment was like 1,000% or 10,000%—something crazy.

So the fourth thing is cash flow consistency. We want to make sure there’s no seasonal panic, that payroll isn’t a magic trick in the off season. We want to try to smooth out cash flow as much as possible. We want to make it boring, predictable, on-time cash flow using Profit First methodology.

So if you are seasonal, you’ve already saved up all your money and now it’s predictable cash flow coming in. You have enough money to pay your bills because you’ve planned for it.

I cannot stress this enough: the market pays a premium for boring. It always has. It always will.

Jon: Awesome. Okay, that’s four. What are the others?

5. Clean Financials

Ryan: Clean financials, Jon. If the books need a tour guide and an interpreter, it ain’t going to happen. I’ve seen it where books were a mess, tax returns didn’t tie out to the financial statements, and it cost somebody a multiple of two.

I also saw it the other way, where you can hand the potential buyer everything on a platter—everything’s clean, everything’s wonderful—and they paid an extra three on the multiple because of how it was gift-wrapped.

Think of it as being audit-ready books. They’re ready, they’re good, and that’s what’s really going to give you a leg up on your competition.

6. Team Depth

Do we have a real management layer? Do we have a visionary, an integrator, department heads? Are they helping us make decisions? Do we have a leadership team structure? Or is your leadership team you, your spouse, and your cousin Jerry?

That’s the difference. We are looking for turnkey. Turnkey is premium. We want to make sure we have a team that can make those decisions.

A great way to think about that: if you left and went on a trip for four weeks, would your company run without you? And if your company would run better without you, that’s what’s going to get you a great potential buyer who’s going to pay for a huge multiple.

7. Growth Trajectory

Revenue is not the underlying factor, but we want to see that the curve is going from left to right in an upward direction. That also means we need to make sure our profitability is increasing as well.

A lot of people—and this goes back to the episode on revenue—will sacrifice their bottom line to increase their sales. Don’t do it. We want to make sure we are scaling things profitably. That’s the key.

Jon: We see a lot of businesses that suddenly have a great year and think, “Oh, I’m going to sell.” Maybe they’re doing $500,000 one year, $550,000 the next year, then $900,000 the following year. And they use that $900,000 as the multiple. Would a buyer look at it that way?

Ryan: A seller will look at it that way—”Take our best year ever and give me a multiple of four off of that.” A sophisticated buyer will take the last three years. What’s your run rate? Is it an abnormality?

They might weight it a little bit more towards that $900,000, especially if you’re forecasting $1.2 million and you’re four months in and hitting your targets. That’s something you can point to.

But the broker will tell you, “Base it on the $900,000 year.” A buyer would come in and say, “Not so fast.”

8. Industry and Market Dynamics

SaaS, for example, goes for 8x to 12x, whereas landscaping is 2x to 3x. You can’t change your industry—and you can’t change your height either. That’s just the way it is. It’s in the eye of the beholder. The market is what the market is. Sometimes markets get crazy and sometimes markets are cold.

Jon: Yeah, that makes a ton of sense. A lot of what you just described sounds like years of work. If an owner is like three years from wanting to sell, is that enough time to put all that in place?

Ryan: We typically say it takes three to seven years to get ready to be sellable. But three years is doable. It’s not comfortable, but it’s enough.

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The Three-Year Roadmap

Year One: The Unsexy Year

You’re going to clean your books, restructure your owner’s compensation, get Profit First running, document the processes that currently live in your head and would die with you in a car accident. Start getting out of owner dependence. Nothing really changes on the outside. Everything changes underneath. We want to make it boring but life-changing.

Year Two: The Team Year

Hire or promote the people who run the business when you’re not in the building. Build up a leadership team so that we can remove you and have business decisions made for you.

This is really going to show a potential buyer that hey, I just want to buy for the cash flow. I want to buy for the ATM. I don’t want to run this business. I want a team that’s going to run it for me.

But the problem is owners have a really tough time delegating. They have a really tough time allowing their teams to make mistakes or figure things out on their own. But this is going to be probably the biggest factor in you getting a higher multiple.

Year Three: The Proof Year

You’ve got two years of clean data, consistent growing financials. The leadership team has gone into their groove. It really will demonstrate that the business operates without you.

You want to diversify your revenue. You’re really starting to build the buyer’s narrative. What do buyers want to see? Predictable cash flow. Recurring revenue. A backlog.

You’re not even selling a pitch—you’re selling proof that this works, that your business is a viable thing for a potential buyer. And that’s when you can start talking about 4x to 5x. If you’re not prepared, you’re going to be stuck at your 2x.

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[Sponsor Break: Backyard Barbecue Capital Partners parody]

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Jon: A little bonus information for sellers too. Most buyers will have what’s called a buy box—they sit down and create criteria for the right business. They’ll be looking for years to purchase the right business.

So they create a buy box with all the right criteria: What is the SDE? How many employees? How many years in business? What vertical is it in? Customer concentration? They’ll even go into the price they’re going to pay, how much deposit, how quickly they pay that deposit back. They put that generally in some sort of spreadsheet.

Is there anything else a business can do to shape things beyond what we’ve just said? Understanding all the factors of multiple—is there anything else that can be done, like thinking through how things are transferable, how the business is sold—asset sale versus outright purchase—anything like that people can do to prepare?

Ryan: Well, I think you need to start assembling your advisors. You need personal advisors, business advisors, so that you have outside perspective on things you can improve—and what you’re going to do with that money once you sell.

You want to be the belle of the ball. You don’t even want it to be a question when you put your listing out there or when word gets around that you’re looking to start the next chapter of your life. You want to have everything ready to go. Have your due diligence ready. Have all your ducks in a row. That way you can make a nice clean exit. And if you have a nice clean exit, you’re going to get top dollar for it.

Jon: Yeah. And if you do view it from the lens of a buyer’s buy box, I think you get extra insight.

One example: a lot of people want an asset sale versus a share sale because you don’t want to buy liabilities in the company. You don’t want to buy any potential legal issues. With an asset sale, somebody’s just coming in and buying the assets.

But when owners and sellers are creating contracts, they don’t necessarily think that their contracts need to be transferable. So that’s something you can plan for. If you have transferable contracts when you make all your deals, somebody coming in and making an asset purchase—those transferable contracts then go with the business.

That can help. That’s one of the things we look at, because if the contracts aren’t transferable and then you have to go in and have conversations with people that you’ve sold work to, there’s a risk there that you don’t get the revenue that’s on the books or in the forecast.

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Jon: Just some things to think about as people go through and plan. This is all great for people who are knowingly and thoughtfully preparing to sell their business. What about owners who say, “Well, I’m not selling this, so it really doesn’t apply to me”?

Ryan: Exit planning is good business.

It applies to you most of all if you don’t want to sell. Exit planning is about having options.

If I have a job with overhead, I don’t have a lot of options at exit. Usually, I’m just going to shut down the garage, shut down the company, and that’s it. Because it was a great job for me. I provided for my family, other families, but it was all owner-dependent, so nobody else is going to buy it.

When you’re doing these things, here’s what’s really nice:

• If you have lower owner dependence, you get your weekends back.
• If you have great team depth, there’s no meltdown when you leave to take your kid to the orthodontist or go to Italy for three weeks.
• If you have clean financials, you’re making decisions based on data, not vibes.
• If you have consistent cash flow, you can sleep at night without a stomach ache.

Building a sellable business isn’t about selling. It’s about building a business that doesn’t need you to survive.

What happens if one of the “5 Ds” happens to you—God forbid, you get into an accident? If you have a sellable business, something that runs without you, that’s still going to provide money for your family for years to come. Whereas if it’s all on you, that thing could collapse immediately. Now, not only do you have insurance and medical bills and all that, but you have no income coming in.

Every owner will exit eventually—whether it’s voluntarily, accidentally, medically, or in a wooden box. “I’m not selling” is not a plan. It’s a postponement. The universe doesn’t care about your plan. It will exit you on its own schedule if you don’t pick one first.

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Jon: Awesome. So if somebody’s listening and they realize they have no idea what their business is actually worth, what’s the first move? What do they do?

Ryan: Get a real number. Not a guess. Not what your buddy got. Not what you need it to be for the retirement math.

Back-of-the-napkin formula:

Take your net income, add your salary, add your spouse’s salary if you’re paying her, add personal expenses running through the business, and subtract what you’d have to pay a real CEO to do your job.

So if you’re making $500,000 and you’d have to get somebody to run it for you at $250,000, the difference is $250,000 that you add. Then multiply it by three—let’s take an average.

If you’re excited, you might be in good shape. If you’re nauseous, congratulations—you just identified the most important project in your business for the next three years.

Then score yourself brutally on the eight factors:

1. Owner dependence
2. Revenue concentration
3. Recurring revenue
4. Cash flow consistency
5. Clean financials
6. Team depth
7. Growth trajectory
8. Your industry

Nobody else has to see this scorecard. This is for you. Take it as fact that from this day forward, this is what you can work on. From this day forward, if you work on these things, the only thing you’re going to do is put more money in your pocket later on—whenever you eventually exit.

Owners who run this exercise come out with a clarity they’ve never had. Knowing is half the battle. I’d rather know where I stand and where I can improve than guess.

Jon: It really puts a focus on what you need to change to be a really solid business doing the right things. Even if you just go through the exercise to check your numbers and see where you’re at, it’s going to give a lot of focus on what you need to improve.

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Jon: Awesome. Really interesting episode. Ryan, what’s the takeaway here?

Ryan: The takeaway is that a buyer doesn’t pay for your suffering—your blood, sweat, and tears. They’re paying for the machine. And the more automated the machine is, the better valuation you’re going to get.

Your sleepless nights, your missed soccer games—it doesn’t matter, unfortunately, when it comes to someone buying your business. What survives are the eight factors I told you about. Work on those and you’re going to do okay.

You can’t change your industry, but you can change the other seven. And industries come and go in vogue. So don’t worry about it. Maybe now is not the right time to sell. Maybe in three years it will be, and you’ll get a higher multiple just based on that.

The difference between 2x and 5x isn’t luck. It’s preparation.

The longer the runway you give yourself—three to seven years—the better off you’ll be, the higher the multiple you’ll get.

And the number one thing: don’t listen to your buddies at the barbecue. Get a real valuation. Stop guessing. Get a roadmap and start working on that plan.

Jon: Awesome. Great episode. Super interesting. This should be spurring everybody’s thought process. Well, we’ll see you next time.

Ryan: All right. Sounds good. Adios.

Jon: Peace out.

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That’ll do it for this episode of From Burnt Out to Bought Out. If anything we talked about today hit home, do us a favor—share this episode with another owner who needs to hear it. And if you’re sitting there thinking, “They’re talking about me,” good. That’s the first step.

Head to the show notes and book a free triage call with our team. No pitch, no pressure, just a real conversation about where you are and what’s possible.

You can also find us on LinkedIn and at wearesynergysolutions.com. New episodes drop every week.

Until next time, stop running the treadmill and start building something you can actually sell.