At Advanced Business Brokers, we often get asked what a business is worth, and invariably most people want it to be a simple math formula. Sometimes referred to as a multiple. Unfortunately, there are many pitfalls to this oversimplification and in reality, multiples are figured out in one direction, by taking a price someone sold a business for and dividing it by some metric (often earnings) to arrive at a multiple.
M (multiple) = P(price) / E (earnings)
From what we learned back in grade school then, by simple math, the following should be true
P = M x E. And yes, that would be correct math, but it is flawed when it comes to valuation. Otherwise, the stock market would be much more predictable and have a lot lower volatility. The truth is that multiples are usually an average of many transactions with some lower and some higher.
“Cash flow is the net amount of cash and cash equivalents being transferred in and out of a company”
The value of a company is driven by two things: cash flow, its ability to make money along with evaluating inherent risks in the industry along with that business. There are factors that can be adjustments to these and therefore there is no simple math formula. No buyer is going to walk in with a blank check and take two numbers and multiply them, fill in that amount and be done. Unfortunately, it’s just not that simple.
Think about it, every business is unique; with different management, employees, business strategies, clients, products, and services. There are other things to consider too like has the business been growing or declining; is the staff seasoned, new, or close to retirement? These factors and many more could add to the value or be a major detractor from it. So where do you start?
The first reality that most business owners need to understand is that smaller businesses (those that make less than $1 million in earnings after expenses) will sell for somewhere between 2 and 4 times their cash flow. We did state that a simple equation like this doesn’t work, however, the fact is that there are lots of risks in these smaller businesses that tend to keep prices in this tight range. However, understanding where in that range is realistic can be the difference of tens of thousands, if not hundreds of thousands of dollars. It also can mean the difference between selling or not getting any offers. There is a reason that currently about 80% of the businesses that go to market DON’T sell.
Buyers will be focused on cash flow and the risks in the business. It is helpful to understand that offers and deal structures reflect the need to pay expenses, make a reasonable wage, and protect against risks. When evaluating cash flow don’t forget that rent and your wage need to be comparable to the current market. This is often a once-a-lifetime event for you, it is highly recommended to build a trusted advisory team: Business Broker, Banker, CPA, Attorney, and others to help you navigate the process.
Having a quality team of advisors (business broker, lawyer, accountant, etc.) to evaluate opportunities will work well for you. It is helpful to understand that the selling of a business is a very emotionally driven time. Business owners have often spent more hours building a business than with their own families and it is their “baby”.
Trust the process and stick to the fundamentals; you may have to walk away from an opportunity if a seller is stuck in emotional logic. Often a simple question to ask is, “does the business cash flow support paying for the loan, business expenses, rent at market rates, an owner’s salary for work in the business (with some left to cover unexpected expenses), or provide a reasonable return on investment? These questions are something your business broker should present to you.
In our world, we help educate sellers to strive to sell their businesses at a fair price and buyers to expect to pay a fair market price. This is often crucial for a smooth and successful transition in ownership because both parties will be working together during that time. If one side feels resentment in the deal, it can make for a very rocky transition, or worse yet, it can lead to a deal not closing at the last minute.
How do you calculate the value of your business? Advanced Business Brokers will assist you! Contact us today!
With over 25 years of dedicated experience, Bob empowers small business owners in the Indianapolis metro area to achieve their entrepreneurial visions, whether by building scalable operations or crafting highly sellable entities. For three decades, he’s cultivated a robust network of owners, buyers, and strategic partners, a resource he fully leverages to help clients meet their unique objectives.
Bob’s expertise spans a diverse range of industries, including trade-based businesses like construction, HVAC, skilled trades, and manufacturing, as well as white-collar professional service firms such as law, finance, marketing, and technical services. Beyond his client work, Bob actively contributes to his community, serving as Treasurer for the Boone County Chamber Board and as well as a board member for both the Central Indiana Police Foundation (CIPF) and Fiscal Sponsorship Allies (FSA).
Bob holds a degree in Mechanical Engineering Technology from Purdue University in West Lafayette, Indiana, and teaches there as well in the Certificate in Entrepreneurship and Innovation Program, which is ranked among the Top 50 programs in the U.S.
He lives with his wife Lori in Zionsville, just outside Indianapolis, and in his free time, he enjoys working on his home, playing golf, and traveling.
With a degree in psychology and a professional background in social work, Marissa
brings a people-centered lens to every project. Her experience includes being a Project
Planning Specialist at GE Aerospace, creating efficient processes and structures that
help teams work smarter and stay aligned. Marissa joins the Main Street Market Maker
team with Advanced Business Brokers to dedicate time and attention to smaller
business opportunities and provide excellent and supportive customer service.
Outside of work, she is a mom of three young men who finds joy in the everyday chaos
of family life. She loves strong coffee, warm beaches, and any excuse to spend time in
the sunshine. Hot yoga and hammocking are some of her favorite ways to reset and
stay grounded and help her show up with more presence both at home and in my
professional life.
Steve brings more than 20 years of experience as a legal and financial professional to
his work with business owners preparing for transition and sale. He advises owners and
their families through every stage of the exit planning and transaction process, with a
focus on thoughtful assessment, risk management, and strategic value enhancement.
Steve is a Certified Exit Planning Advisor (CEPA®) and an active member of the Exit
Planning Institute. He previously served as Director of the Small Business Development
Center in Toledo, Ohio, where he worked closely with entrepreneurs across a wide
range of industries on growth, financing, and succession planning initiatives.
Earlier in his career, Steve practiced law with a nationally recognized Chicago-based
law firm and held roles in capital markets and commercial banking with leading financial
institutions. This multidisciplinary background allows him to approach business
transactions with a practical understanding of legal, financial, and operational
considerations.
As a business broker, Steve specializes in industrial and manufacturing companies,
skilled trades, and professional service firms, including marketing, staffing, and financial
services businesses. Steve earned his Juris Doctor from Loyola University Chicago
School of Law and a bachelor’s degree in economics from the University of Notre
Dame. He lives in the Toledo area with his wife and two daughters. Outside of work, he
enjoys traveling, cooking, and spending time at his family’s lake house.
A lifelong resident of Fort Wayne, Indiana, Dr. Mark Hagar brings decades of hands-on experience in small business ownership, acquisitions, and turnarounds to his role as a business broker. Over his distinguished career, he has acquired and operated more than 20 companies and engineered over 50 successful turnarounds, giving him a uniquely practical understanding of what makes businesses succeed, and sell. His portfolio spans manufacturing, distribution, and service firms in industries including printing, education, military contracting, aerospace, and orthopedics. This diverse background enables him to identify value, anticipate buyer needs, and structure complex deals with confidence and precision.
Mark holds a Doctorate in Business Administration (DBA) from Cranfield University’s School of Management in Bedford, England—one of Europe’s leading business schools. His research on small business resilience and operational excellence has been recognized by the Small Business Institute (SBI), the United States Association for Small Business and Entrepreneurship (USASBE), and the International Council for Small Business (ICSB).
In addition to his business career, Dr. Hagar has served as a member of faculty at several institutions of higher education, including Holy Cross College (Notre Dame), Trine University, and the University of Saint Francis. He also hosted Your Business Matters, a small business–focused radio show and podcast for more than a decade and is the author of Small Fortunes – the Acquisition Entrepreneur’s Guide to Buying a Profitable Small Business.
A passionate advocate for entrepreneurs, Mark previously chaired the Indiana Leadership Council for the National Federation of Independent Business (NFIB), representing small business owners before state and federal legislators. He currently serves as President of the Allen County, Indiana Economic Development
Commission.
As a broker, Mark specializes in industrial, manufacturing, and distribution firms, with particular expertise in special situations, distressed assets, and complex transitions where experience, creativity and discretion are central to success.