When it comes to valuing a private business, one of the most common mistakes owners make is relying on a “multiple”, whether it’s 5x EBITDA, 2x revenue, or another quick benchmark.
It sounds simple. It’s what people talk about at industry events or with their CPAs. But that simplicity is misleading and often dangerous for long-term financial planning.
Let’s unpack why.
The Problem With the “Multiple Mindset”
You will often hear different rules of thumb:
- “A good business sells for 5x EBITDA.”
- “Our industry trades at 2x revenue.”
- “Use a 4x multiple as a starting point.”
While these numbers might seem like useful shortcuts, they rarely hold up in reality.
Try this exercise: imagine you’re buying out a competitor that’s similar to your own business in size and profitability. How much of your own money would you actually spend on that deal?
Most owners realize they wouldn’t pay anywhere near what they think their own business is worth.
Why That Happens: Risk and Uncertainty
Private businesses come with a unique set of risks:
- Staff departures after a sale
- Hidden operational issues
- Customer relationships that may not transfer
- Inefficiencies that only show up post-acquisition
Because of these unknowns, buyers apply a risk discount, paying less to offset uncertainty.
These “risk premiums” exist because private companies lack transparency. Unlike public firms, they don’t have standardized reporting or easily measurable data. Much of the value depends on relationships, systems, and processes that may or may not survive a transition.
What You Should Be Looking At
A meaningful valuation goes beyond financial multiples. It looks at the intrinsic and operational health of the company, what we call “value gaps.”
Ask yourself:
- Are contracts with vendors and clients well-documented?
- Do you have clear HR processes and employee agreements?
- Can you tie profitability back to specific activities?
- Are your operations efficient and repeatable?
These are the elements that make a business transferable — and therefore more valuable.
The Real Way to Understand Your Business’s Worth
Stop relying on “5x EBITDA” or any other arbitrary formula. These shortcuts can lead to overconfidence, poor planning, and ultimately disappointment when it’s time to sell or transition out.
Instead, conduct a comprehensive assessment of your business’s risks, operations, and management structure. Identify where inefficiencies and uncertainties lie. Reducing these risks directly increases the true market value of your company.
Final Thought
Your business isn’t worth what a formula says, it’s worth what a buyer is willing to pay after understanding its risks and potential.
