When someone asks what their company is worth, they almost always have a number in mind already. It usually comes from one of three places: what someone paid for a company in the sector last year, what their accountant told them, or what they need in order to retire comfortably. None of the three is a valuation.
The real figure comes out of fairly mechanical arithmetic, and it is worth knowing before you sit down, because almost every variable can be improved with twelve months' notice.
The starting point is not profit, it is normalised EBITDA
Most small and mid-sized transactions close by applying a multiple to EBITDA, that is, earnings before interest, tax, depreciation and amortisation. But not the EBITDA in your accounts: the normalised figure, which is what would remain if the business ran without you and without your arrangements.
The usual adjustments, all of them downwards:
- The owner-director's pay is replaced by what it would cost to hire a manager to do that job at market rates. If you draw 30,000 euros and the role is worth 70,000, EBITDA falls by 40,000.
- Related-party rents are adjusted to market value. A warehouse owned by the shareholder and let cheaply inflates profit and gets corrected.
- Personal expenses running through the company are stripped out of costs, yes, but they also prompt the question of what else is not where it should be.
- Non-recurring income and costs disappear: compensation received, a one-off grant, an extraordinary order that will not repeat.
A multiple is then applied to that adjusted EBITDA. And the multiple is not a sector number: it is your company's number within the sector.
What moves the multiple up and down
Two companies with the same profit can end up twice as far apart on price. The difference always lies in the risk that the profit will still be there next year without the seller inside.
What raises it: recurring, contracted revenue rather than one-off sales; a spread client base; stable margins over three or four years; a management team that is not the owner; orderly, audited accounts; and intangible assets that are genuinely yours, with industrial and intellectual property registered in the company's name and not the founder's.
What lowers it, and is discounted without mercy: client concentration, where any buyer's mental threshold sits around 30 % of turnover with a single client; dependence on the founder to sell, buy or decide; contracts with key clients that are unsigned or lack a change-of-control provision; open litigation; and any employment, tax or regulatory contingency that surfaces in the review.
The trap: price is not what you receive
This is where half of all negotiations break down, not through bad faith but through vocabulary.
Offers are almost always framed on an enterprise value basis, cash free and debt free. That means net financial debt is deducted from the price and working capital is adjusted to a normal operating level. If you are offered five million for a company with one and a half million in loans, you are not receiving five.
Then there is the calendar. Part of the price is commonly deferred, held in escrow for a period, or made conditional on future results through an earn-out. The headline says five million; what reaches you on signing may be three, and the rest depends on things you will no longer control.
That is why the right question is never "what is it worth" but how much is received, when, and against what security.
The twelve months before are worth more than the negotiation
Most of the value is won or lost before the buyer appears, through measures that cost nothing:
- Separate personal from corporate. Vehicles, property, insurance, expenses. Anything mixed is a price cut and a delay.
- Put contracts in writing, especially with the clients who carry the revenue, and review change-of-control clauses.
- Check who owns the intangibles: brand, domain, software, databases. It is surprising how often the trademark sits in the founder's name.
- Regularise employment matters: classifications, hours, false self-employment. That chapter generates more contingencies in the review than any other.
- Close three years on the same accounting policy, because what a buyer buys is a trend, not one good year.
- Reduce how indispensable you are. If the business cannot go a fortnight without you, you are selling a job, not a company.
And a word about timing
Companies sell best when they do not need to be sold. An orderly process takes between six and twelve months from preparing the documentation to signing, and haste destroys more value than any weakness in the business.
If you are thinking of selling within the next two years, the useful conversation is now: not to set a price, but to know what needs fixing before someone else looks at it.
An opening valuation and a list of what to put right fit into a sixty-minute consultation. It is the best-paid work you will do in the whole process, because it is done in time.
This article contains general information for informative purposes and does not constitute legal advice or an investment recommendation. The rules cited may have been amended after publication; always check the text in force before taking a decision.