Three Valuation Methods, Three Different Answers, One Business

A client asks what their firm is worth. You run the numbers properly and come back with an answer. A second adviser runs the numbers just as properly and comes back with something 60% higher. Neither of you has made a mistake.

This happens because “what is it worth” is not one calculation. It is at least three, and they do not agree.

The same firm, valued three ways

Take an accounting practice billing $2,000,000 a year. The owner works in the business and takes a mix of salary and distributions. Once the owner’s compensation and personal costs are added back, seller’s discretionary earnings come to $500,000. Replace the owner with a manager on $180,000 and earnings before interest, tax, depreciation and amortisation come to $320,000.

Three standard approaches, using the midpoint multiples that accounting firms actually trade at:

Same practice, same year, same data. A spread of $900,000, or 60% between the lowest and highest figure.

Widen it to the full ranges rather than the midpoints and the gap becomes absurd. Seller’s discretionary earnings at 2.0x to 4.0x gives $1.0m to $2.0m. Earnings before interest, tax, depreciation and amortisation at 4.0x to 8.0x gives $1.28m to $2.56m. Revenue at 0.8x to 1.8x gives $1.6m to $3.6m. The accounting firm multiples used here, and the equivalents for 42 other industries, are published in full at https://valzura.com/.

Which one is right depends on who is buying

The choice of basis is not a matter of preference. It follows from how the business runs.

Seller’s discretionary earnings applies when the owner is genuinely working in the business and their compensation is a material part of the cost base. The buyer is purchasing a job plus a profit stream, and needs to know the total cash available to one working owner. Most practices under roughly $1m in revenue sit here.

Earnings before interest, tax, depreciation and amortisation applies once there is a management layer that would survive the owner leaving. The buyer is purchasing a cash flow that does not depend on them turning up. This is the basis in almost every transaction above a few million in revenue, and it is the one financial buyers argue from.

Revenue multiples are a sanity check rather than a valuation, useful when earnings are distorted by a one-off year or heavy reinvestment. Applied to a stable, profitable firm they usually flatter it, which is why owners like them and buyers rarely open with them.

What this means in an advisory conversation

The practical consequence is that the basis matters more than the negotiation. Moving a client from a seller’s discretionary earnings framing to an earnings before interest, tax, depreciation and amortisation framing changed the answer by $420,000 in the example above. No amount of haggling over the multiple does that.

So the useful early question is not “what multiple should we use”. It is “which basis will a buyer apply to this business, and what would it take to move it to the better one”. For an owner two or three years from an exit, that is an actionable brief: build a management layer, reduce the dependence on the principal, and the firm gets valued on a different and more generous basis entirely.

The second useful question is where inside the range the business sits. Client concentration, contracted versus assumed recurring revenue, and the quality of the records move a firm from the bottom of its range to the top, and all three are visible to a buyer within a week of starting diligence.

A note on using benchmark data

Industry multiples are a starting point, not an answer. They describe what comparable businesses traded for, which is a different question from what this business is worth to this buyer. A strategic acquirer consolidating a market pays for the client list. A financial buyer pays for the cash flow and discounts anything that walks out of the door with the founder.

Used properly, benchmarks do two things well. They tell a client quickly whether the number in their head is inside the range of plausible outcomes. And they identify the two or three variables worth working on while there is still time to work on them. Both are more valuable eighteen months before a sale than during diligence, when every one of those variables has become a discount rather than a project.