Question 1

What is the difference between Enterprise Value and Equity Value?

Accepted Answer

Enterprise Value (EV) is the total value of a company's core operations, representing the theoretical price to buy the entire business free of any debt or cash. Equity Value is the value that belongs strictly to the shareholders. To move from Enterprise Value to Equity Value, you must add the company's cash and subtract its total debt. If you buy a company, you pay the Equity Value to the current owners, but you assume the debt, meaning the true cost to you is the Enterprise Value.

Question 2

How do add-backs work in calculating SDE or EBITDA?

Accepted Answer

Add-backs are expenses recorded on the income statement that do not reflect the true, ongoing operational cost of the business. To calculate accurate earnings, you "add back" these expenses to the net income. Common add-backs include the owner's salary, personal expenses run through the business (like a personal vehicle or travel), one-time legal fees, or non-cash expenses like depreciation. The goal is to reconstruct the financial statements to show exactly how much cash the business naturally produces.

Question 3

Why is my business valuation lower than my annual revenue?

Accepted Answer

A business is ultimately valued based on its profitability and cash flow, not its top-line revenue. If your business generates $5 million in revenue but costs $4.9 million to operate, leaving only $100,000 in profit, a buyer will only pay a multiple of that $100,000. In low-margin industries like grocery or construction, it is entirely normal for a business to be valued at a fraction of its total revenue. Only highly profitable or hyper-growth companies (like SaaS) trade at multiples of revenue.

Question 4

Can I value my business based on its future potential instead of past performance?

Accepted Answer

Financial buyers and banks will almost exclusively value your business based on historical, proven performance (usually the Trailing Twelve Months). They will not pay you for future growth that they have to execute and risk their own capital to achieve. However, if you are selling to a strategic buyer (a competitor) or raising venture capital, you can negotiate a valuation based on future potential, provided you have a highly defensible DCF model and a proven track record of hitting your growth projections.

Question 5

What is a "good" multiple for my small business?

Accepted Answer

There is no universal "good" multiple, as multiples are dictated by industry risk and business size. However, for a standard Main Street business (under $2 million in revenue), an SDE multiple between 2.0x and 3.0x is considered healthy. If your business is highly systematized, has recurring revenue, and requires little owner involvement, you can push toward 3.5x or 4.0x. If the business is entirely dependent on your personal labor (like a solo consulting practice), the multiple may be 1.5x or lower.

Question 6

How does debt affect the valuation of my business?

Accepted Answer

Debt does not affect your Enterprise Value (the value of the operations), but it directly reduces your Equity Value (the cash you take home at a sale). If your operations are valued at $2 million, and you take out a $500,000 bank loan, your Enterprise Value remains $2 million. However, when you sell, $500,000 of the proceeds must go to the bank to clear the loan, leaving you with an Equity Value of $1.5 million. Debt is a mechanism for financing the business, not a factor in determining operational worth.

Question 7

What is a Discount Rate and how do I choose one?

Accepted Answer

The discount rate is the percentage return an investor requires to justify the risk of buying your business. It is used in DCF models to convert future cash flows into present-day dollars. Choosing the rate requires calculating the Weighted Average Cost of Capital (WACC), which blends the cost of debt and equity. For stable, blue-chip public companies, the discount rate might be 7% to 9%. For riskier private mid-market companies, it typically ranges from 12% to 20%. Higher risk mathematically requires a higher discount rate, which lowers the valuation.

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