2026 Valuation Guide

Most owners start with a number they heard: a multiple a friend got, a figure from a trade show, a rule of thumb for the industry. Buyers start somewhere else. They rebuild your earnings from the ground up, decide how much risk sits inside those earnings, and then look at who else is bidding. This guide walks through each of those steps the way our advisors do when we prepare a company for market, so that the first number you hear from a buyer is not the first time you have seen it.

Earnings, as a buyer reads them

Buyers of companies doing $2M or more in revenue price the business on adjusted EBITDA: earnings before interest, taxes, depreciation and amortization, restated to show what the company earns for an owner who is not you. Your tax return was built to minimize taxable income. The buyer's model is built to find sustainable cash flow. The distance between those two numbers is the recast, and it is where a large share of the final price is decided before anyone discusses a multiple.

Owner compensation

If you pay yourself $400,000 and a general manager who could do your job would cost $180,000, the difference is added back. If you pay yourself $60,000 and the same manager would cost $180,000, the difference is subtracted. Buyers run this in both directions, and so do we. Family members on payroll are treated the same way: added back if they do not work in the business, adjusted to market rate if they do.

One time costs

A lawsuit settled last year, a recruiting fee for a role that is now filled, the cost of moving facilities, a consulting project that is finished: these are legitimate add backs if they are documented and will not recur. The test a buyer applies is simple. Would the next owner face this cost again in a normal year? If the answer is no, and you can show the invoice, it survives.

Add backs that survive a quality of earnings review, and ones that do not

Buyers at this size commonly commission a quality of earnings review: an accountant's examination of your numbers that is narrower than an audit and far more skeptical. Here is how common adjustments tend to fare.

Adjustment	Usually survives	Why
Owner salary above market rate	Yes	Verifiable against payroll and a market replacement cost
Owner health insurance, vehicle, phone	Yes, if documented	Clearly personal, clearly traceable
Documented one time legal, recruiting or relocation costs	Yes	Invoice in hand, cause will not recur
Depreciation and amortization	Yes	Non cash by definition, but expect a question about replacement capital spending
Travel and meals labeled personal without receipts	Partly, or not at all	The reviewer cannot separate personal from business
Marketing labeled discretionary that the buyer will still need	No	If the spending produced revenue, it is a real cost
Rent below market paid to an owner's entity	Reversed against you	The buyer will pay market rent, so earnings go down
Projected savings from changes not yet made	No	Buyers pay for earnings they can verify, not for plans
Unreported cash revenue	No	Cannot be verified, and it raises questions about everything else

The practical rule our advisors use: if an add back would make you uncomfortable explaining it to the buyer's accountant, leave it out of the recast and mention it in conversation instead. An aggressive schedule that collapses in diligence costs more than the add backs were ever worth, because every other number is now in doubt.

The range, and what moves it

With adjusted EBITDA settled, the buyer applies a multiple. For established companies in the lower middle market, the multiple is a measure of risk: how confident the buyer is that the earnings will still be there in three years, under new ownership, without you. Six factors do most of the moving.

• Size. Larger earnings attract more buyers, including private equity groups that will not look below a certain EBITDA floor. A company with $3M of EBITDA will generally command a higher multiple than an otherwise identical company with $800,000, because a different group of buyers is at the table. Our closed transactions follow this pattern: the $28M heavy industry engineering company in Texas closed at 6x EBITDA, and the $2.5M screen printing company in California at 4.2x.
• Recurring revenue. Contracts, maintenance agreements, subscriptions and repeat customers with a long history give a buyer visibility into next year. Project revenue that must be won again every quarter does not. Two companies with the same EBITDA can sit a full turn apart on this factor alone.
• Customer concentration. When one customer accounts for a large share of revenue, buyers see a single phone call that could remove a quarter of the earnings they are paying for. The usual response is a lower multiple, an earnout tied to that customer staying, or both. In our experience a single account above roughly 20% of revenue gets noticed; above 30% it starts to shape the structure of the deal.
• Owner dependence. If the top customer relationships, the pricing decisions and the key supplier terms all live with you, the buyer is purchasing a business that changes the day you leave. The more the company runs without you, the less the buyer discounts for transition risk.
• Team depth. A second layer of management that can hire, quote, deliver and collect without escalation is what lets a financial buyer say yes without putting their own operator in on day one.
• Growth. Three years of steady growth earns a premium. A decline in the most recent year, even a small one, invites hard questions about whether the trailing earnings are the right base at all.

A worked example

Take a hypothetical services company with $9M of revenue. The tax return shows $700,000 of net income. The recast adds back $150,000 of owner compensation above market, $200,000 of depreciation and amortization, $80,000 of documented one time costs and $70,000 of owner personal expenses run through the business. Adjusted EBITDA is $1.2M.

Now the range. Suppose comparable companies in this sector trade between 4x and 5.5x adjusted EBITDA. The company has one customer at 28% of revenue and the owner still handles the three largest accounts personally. Buyers will anchor toward the low end: 4x to 4.5x, or $4.8M to $5.4M, likely with an earnout tied to the large customer.

Take the same company two years later. The owner has hired a sales lead who now owns those three accounts, the large customer is on a three year contract, and revenue has grown 10% a year. Same industry, similar EBITDA, but the risk profile has changed. The same buyers now see 5x to 5.5x, or $6M to $6.6M, with more of it in cash at close. Nothing about the product changed. The way the earnings are perceived did.

This is what we mean when we say most of the price is set before a buyer sees the business. The recast decides the base. The risk factors decide the range. Both are substantially in the owner's hands before any buyer is contacted.