A founder told me this week that his company is worth $40 million.
So, of course, I asked: “How do you know?”
He told me that’s what it had been valued at for their key-man life insurance.
And then I had to give him an answer he didn’t particularly love: That doesn’t necessarily mean an investor or buyer would value the company at $40 million.
A valuation isn’t just a number attached to your company forever.
You might need one for insurance, an estate plan, a divorce, a partner buyout, employee equity, taxes, financing, bringing in an investor or selling the company. Those exercises can be done for different purposes, using different assumptions and standards.
So before you say, “My company was valued at $40 million,” there’s a more useful question: Valued by whom, for what purpose, and using what assumptions?
And then there’s what it’s worth to you
There’s another kind of value here that no valuation is going to capture.
The freedom of not having a boss. The thrill of winning a customer everyone said you’d never get. Making something up on Tuesday and trying it on Wednesday. Employing people you care about. Seeing your family name on the building. Having your kids work beside you. Being the person everyone calls when something impossible needs to get figured out.
The agency. The adrenaline. The creative satisfaction. The occasional chaos you secretly kind of love.
Nobody is going to pay you for those things.
And I get why a founder might say, “Then I don’t care what someone else thinks it’s worth. I’m not selling it.”
Fair enough. Maybe you shouldn’t.
There are things a business can give its founder that are worth far more to that founder than they will ever be worth to a buyer.
But it’s useful to know the difference.
What your business is worth to you and what someone else will pay you for it are two completely different questions.
The multiple isn’t the starting point
The other place I see founders get tripped up is the multiple.
“Companies like ours are selling for five times EBITDA.”
Okay. Maybe.
But five times what?
Are the earnings clean? Sustainable? Growing? How dependent are they on one customer? How much revenue depends on the founder? Is there a management team? Are margins holding? How much capital will the business need?
Two companies with exactly the same revenue and EBITDA can be worth very different amounts to a buyer.
That’s because a buyer isn’t only buying what happened last year. They’re buying their confidence in what happens next.
So what creates that confidence?
- Earnings quality — Are the numbers reliable, normalized and understandable?
- Customer concentration — How much revenue disappears if one important customer leaves?
- Repeatability — Does revenue come from a repeatable engine or founder heroics and one-off wins?
- Management depth — Is there a team capable of running the company?
- Founder dependence — What relationships, knowledge and decisions leave with the owner?
- Growth durability — Is there a credible path forward, or did the company just have a great year?
- Systems and information — Can someone understand what’s happening without reconstructing the company from the founder’s memory?
- Risk — Key employees, suppliers, contracts, legal issues and other exposures all affect confidence.
- Transferability — Can the things creating the earnings actually transfer to a new owner?
Treat value as feedback on business quality
If one customer represents too much revenue, that’s not only a valuation issue. It’s operating risk.
If nobody can run the company without you, that’s not only a buyer issue. It affects your freedom now.
If your financial information is hard to trust, that’s not only a due-diligence issue. It makes your own decisions harder.
That’s why I think founders should understand value before they want to sell.
The point isn’t to obsess over a hypothetical price. It’s to understand what makes someone else confident that the business will continue to perform when everything isn’t exactly as it is today.
Understand what drives financial value. Build more of it if you want to.
And keep the parts nobody can put a multiple on.