One of the most common misconceptions I encounter as a business broker is the belief that a company’s value is simply the total of its physical assets. Business owners will often say, “I have $500,000 worth of equipment, so my business must be worth at least that much more.” Others will point to unused capacity and argue that a buyer could grow the business significantly without additional investment.
While those statements may feel logical, they are not how buyers, lenders, or appraisers determine value.
Businesses are valued based on the cash flow they generate today and the risk associated with sustaining that cash flow into the future. Potential matters, but it is not paid for dollar for dollar.
Most privately held businesses are valued using a multiple of earnings, typically Seller’s Discretionary Earnings (SDE) or EBITDA. Buyers focus on historical performance, consistency, and how transferable the business will be after the owner exits.
Comparable sales are critical. If similar businesses in the same industry are selling for two to three times SDE, that range becomes the valuation framework. Those comparable businesses already had equipment, employees, and operational capacity in place.
Unused capacity represents opportunity, but opportunity comes with risk. Until capacity is converted into revenue and profit, it remains potential, not cash flow. Buyers are happy to benefit from upside, but they are not willing to prepay for it.
Manufacturing buyers value current performance, margins, customer concentration, and operational efficiency. Unused machine time or additional shifts represent opportunity, not immediate value.
In trades such as HVAC, plumbing, and electrical contracting, buyers focus on recurring revenue, technician retention, systems, and consistent margins, not just trucks and tools.
Restaurants are valued on proven cash flow, location, lease terms, and operational consistency. Kitchen size and seating capacity only matter if demand already exists.
The most effective way to increase business value is to convert potential into performance. When unused capacity becomes consistent revenue and profit, the market will reward it.
If you are thinking about selling your business, understanding how buyers actually determine value is critical to a successful outcome. Proper preparation, realistic pricing, and positioning your business around cash flow and risk can make a meaningful difference in both sale price and deal certainty.
I work directly with business owners to help them understand what their business is really worth, how buyers and lenders will view it, and what steps can be taken to improve value before going to market.
If you would like a confidential conversation about selling your business or preparing for a future exit, I would be glad to help. Give me a call at 330-650-9000.
Bill White Jr.
Murphy Business Sales of Ohio
Excellence in Business Transaction
