Most Business Owners Ask The Wrong Question About Business Valuation

The real work of value creation begins years before a business is sold.

Ireland is witnessing a significant transfer of business ownership.

Over the coming decade, many founder-led businesses will face important decisions around succession, investment, acquisition or sale. For some owners, their business will represent the largest asset they ever own. For others, it will be the primary source of their retirement wealth.

According to a recent IFAC Family Business Report, 77% of Irish family business owners have most or all of their personal wealth tied up in their business.

Yet when business owners begin to think about value, the conversation often starts with a single question:

“What is my business worth?”

It’s an understandable question, but the answer is often more complex than many owners realise. After many years of buying, selling, growing and advising businesses, I’ve learned that valuation is rarely determined by a simple multiple of EBITDA.

Understanding Business Valuation

The discussion should begin with three questions:

1. Which EBITDA are we valuing?

2. What multiple should be applied?

3. What drives buyer confidence?

The answers to these questions can have a significant impact on value and, as importantly, deal certainty.

Question 1: Which EBITDA Are We Valuing?

At first glance, EBITDA appears straightforward. In reality, it is often one of the most debated aspects of any transaction.

The discussion is rarely about the reported EBITDA in the accounts. Both buyers and sellers will typically seek to arrive at a normalised EBITDA by adjusting for one-off, exceptional or non-recurring items that do not reflect the underlying performance of the business.

The difference arises when determining which period of earnings should form the basis of valuation.

Buyers generally place greater weight on historical normalised EBITDA because it is proven, measurable and capable of being verified through due diligence.

Sellers, on the other hand, often focus on future normalised EBITDA. They can see the opportunities ahead, the contracts being negotiated, the investments being made and the growth they believe the business is capable of achieving.

From the seller’s perspective, the future potential of the business should be reflected in today’s valuation. From the buyer’s perspective, future growth remains unproven and carries execution risk.

This is often where valuation expectations diverge. One mechanism commonly used to bridge that gap is an earn-out structure.

The buyer pays for proven performance today, while the seller has the opportunity to participate in future value creation if agreed performance targets are achieved.

Ultimately, valuation is rarely just a debate about the multiple.

It is often a debate about how much of the future should be reflected in today’s price.

Question 2: What Multiple Should Be Applied?

The next discussion is usually around the multiple itself.

Business owners often hear about companies selling for four, five, six or more times EBITDA and naturally wonder where their business sits.

The reality is that there is no universal multiple.

Valuation multiples are influenced by many factors, including:

• Industry sector

• Scale of the business

• Growth profile

• Market conditions

• Strategic buyer interest

• Availability of financing

• Competitive tension during a sale process

Two businesses operating in the same sector can achieve very different outcomes.

Which leads to the most important question of all...

Question 3: What Drives Buyer Confidence?

Investors do not buy historical profits. They buy future earnings.

The more confidence a buyer has in the future performance of a business, the more attractive that business becomes.

In many cases, the valuation multiple is simply a reflection of buyer confidence.

When buyers believe earnings are sustainable, scalable and capable of growing, they are often prepared to pay more.

When uncertainty exists, valuations tend to fall.

The factors that build confidence include:

• Recurring revenue

• Diversified income streams

• Low customer concentration

• Quality of earnings

• Strong leadership teams

• A visible sales pipeline

• Defensible market position

• Robust systems and processes

• Quality financial reporting

• Clear strategic direction

  
  

The higher the quality of earnings, the greater the confidence a buyer will typically have in the future performance of the business.

And greater confidence often translates into a higher valuation.

The Businesses That Create The Most Value Focus On Both Earnings And Confidence

Many owners focus on growing Revenue and EBITDA. They should. Higher earnings generally lead to higher valuations.

However, the most valuable businesses also focus on increasing buyer confidence.

For example:

• Introducing recurring revenue models

• Diversifying the customer base

• Strengthening the management team

• Reducing reliance on the founder

• Improving governance and reporting

• Creating a credible growth strategy

These initiatives can increase EBITDA. They can also increase confidence in the future sustainability of those earnings.

The impact can be significant.

A business generating €1 million of EBITDA at a 4x multiple is worth €4 million.

If EBITDA grows to €1.5 million and the business becomes more resilient, scalable and attractive to buyers, it may justify a 6x to 8x multiple.

The valuation increases to €9-12 million.

The increase in value comes from improving both the earnings and the confidence behind those earnings.

Creating Value Before A Transaction

One of the biggest misconceptions in the market is that value is created during a sale process. In reality, most value is created long before a business goes to market.

The transaction process helps realise value. It rarely creates it.

The most successful founder-owners begin preparing years before they intend to sell.

They look at their business through an investor’s lens and ask:

• What would concern a buyer?

• What would increase confidence?

• What would make the business more valuable?

• What would justify a premium valuation?

• What would make the business less dependent on me?

Those questions often lead to strategic decisions that improve performance, increase value and enhance deal certainty.

Final Thoughts

Most business owners ask:

“What is my business worth?”

A better question might be:

“What can I do today to maximise the value of my business tomorrow?”

The strongest valuations are achieved when sustainable earnings growth is combined with confidence in future performance.

That confidence is built through recurring income, diversification, leadership strength, governance, strategic clarity and execution. The transaction is simply the point at which that value is realised. The real work of value creation and ensuring it stands up to buyer due diligence begins years earlier. Every business owner will eventually face decisions around growth, succession, investment or sale. The earlier those conversations begin, the greater the opportunity to influence value.

If you’re thinking about the future value of your business and would like an independent perspective, I’d be delighted to have a confidential discussion.

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