Why Understanding Value Matters

Introductory Dialogue:

When it comes to selling a business, most owners focus only on the here and now. But buyers and lenders don’t just look at today — they look at the story your financials tell over time.

That’s why it’s critical to review at least three years of financial history (and ideally as much as seven). This look-back isn’t just about the numbers; it’s about identifying trends. If sales and profits have been steadily growing, that’s compelling. If revenues bounce up and down, it creates doubt. Consistency and growth always attract more favorable offers.

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Rule 1: Keep Your Records Clean and Consistent

• Tax Returns and Profit/Loss Statements Must Align. Gross revenues should match dollar-for-dollar.

• Stay Between the Lines. Start with gross revenues and end with net income. Any adjustments should only be items in between — not distributions, dividends, or after-the-fact add-ons.

• Clarity is King. Buyers and lenders expect organized, transparent records. If you’ve got $20,000 in Costco charges, don’t just say “half was business.” Take time to classify everything clearly. People are investing not only money, but their future income — and they want confidence that the numbers are accurate.

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Rule 2: Understand the Two Key Profitability Numbers

Business owners often get confused about which numbers really matter. While net income and EBIT can be useful, buyers and banks usually focus on these two:

Discretionary Earnings (Owner’s Benefit)
• Represents the net income available to one working owner, after adding back expenses that are not essential to running the business.
• Adjustments include: depreciation, amortization, interest, personal car not used in the business, family meals, or the salary for a child on payroll without a true role.
• If multiple owners work in the business, discretionary earnings always reflects just one owner’s role. Additional owners must be “replaced” with a market-rate salary.
• Example: A couple takes $200,000 each from the business. If it costs $50,000 to replace one spouse’s role, then $150,000 is the adjusted discretionary earnings.

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
• Similar to discretionary earnings, but goes one step further: it also replaces the primary owner’s role with a market-rate manager.
• The replacement value must include salary plus payroll taxes, benefits, and other employment costs.
• Example: If the owner pays themselves $100,000 but a replacement manager costs $85,000 (salary + taxes + benefits), then the adjusted EBITDA adds $15,000 back into the value.

Key Point:
• Discretionary Earnings shows the benefit for one working owner.
• EBITDA shows the performance of the business independent of the owner — as if professionally managed.

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Rule 3: Look Beyond One Year

One great year of profits does not outweigh several years of weak performance. Buyers and lenders will always look at the pattern over time. Consistent, verifiable earnings are far more valuable than a single “spike year.”

Takeaway:
• Strong records over multiple years = trust and higher value.
• Inconsistent or casual records = red flags and reduced offers.

Do you know what your business is worth?

Most business owners are surprised to learn how buyers (and banks) actually view their financials. It’s not just about this year’s results — it’s about the story your numbers tell over time.

Here are three key things every owner should know:

Trends Matter. Buyers want consistency and growth. A strong three-to-seven-year track record of steady revenues and profitability builds confidence. One “great” year doesn’t outweigh several weaker ones.

Clean Records Build Trust. Your profit & loss statements should align with your tax returns. Gross revenues should match dollar-for-dollar, and adjustments should only come from what’s in between. Messy or unclear books are red flags.

Two Numbers Stand Out.
• Owner’s Discretionary Earnings (ODE): Profit available to one working owner, after adding back non-essential expenses.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization — adjusted to reflect the cost of hiring a professional manager in place of the owner.

Buyers, lenders, and investors look closely at these numbers to judge both performance and transferability.

Remember to put the right team in place. Need to boost your business to make it more sellable? Check out PPP.

If you want to see where your business stands today, try our free valuation estimate tool here:
🔗 What Is My Business Worth?