Exit Planning: The Art and Science of Valuations

How Much Is Your Company Worth?

How to value a business for sale starts with a hard truth: the number is what a buyer will actually pay, not what the company is worth to you. Three approaches govern the work, income, market, and asset, and for most profitable operating companies the market approach wins, with value quoted as a multiple of adjusted EBITDA. At indinero, that conversation starts with the books, because the books are what a buyer reprices.

How to value a business for sale produces a defensible range, not a single number, from three approaches every credentialed appraiser must weigh. Which one carries the weight depends on what kind of company you run and who’s buying. A profitable services business and a pre-profit software company get valued on different metrics, by different buyers, against different comparable sets.

The three approaches, and which one governs

The AICPA codified the framework in the Statement on Standards for Valuation Services, VS Section 100, issued in June 2007 and effective for engagements accepted on or after January 1, 2008. A CPA performing a valuation engagement has to consider all three approaches and document why the ones not used were rejected (Source: AICPA, VS Section 100, 2007).

• Income approach. Value equals the present value of expected future cash flow, run either as a multi-year discounted cash flow or a single-period capitalization of earnings. It fits companies with forecastable cash flow and a defensible discount rate. Two honest caveats: terminal value routinely carries most of a DCF result, and the company-specific risk premium is where the subjectivity hides.
• Market approach. Value comes from what buyers actually paid for comparable companies and precedent transactions, expressed as a multiple of revenue, EBITDA, or seller’s discretionary earnings. This governs almost every real lower-middle-market and mid-market sale.
• Asset approach. Value equals adjusted net asset value. It fits holding companies, asset-heavy businesses, and companies whose earnings don’t support a going-concern premium.

The IRS got there decades earlier. Revenue Ruling 59-60, issued in 1959, is still the foundational US guidance on valuing closely held stock. It lists eight factors an appraiser has to weigh, including the nature and history of the business, the economic and industry outlook, book value, earning capacity, dividend-paying capacity, goodwill, prior sales of the stock, and the market price of comparable public companies. It says plainly that no single formula applies universally, and it directs that operating companies be weighted toward earnings while holding companies be weighted toward assets. The IRS still publishes applied valuation job aids that walk its own examiners through the ruling (Source: IRS, Valuation of Assets, accessed 2026). If you have cross-border operations, expect buyers to want documentation consistent with the International Valuation Standards, which took effect January 31, 2025 (Source: IVSC, 2025).

SDE, EBITDA, and adjusted EBITDA are three different numbers

This distinction is the heart of reading EBITDA and SDE multiples, and it decides whether a quoted multiple means anything at all.

• SDE, or seller’s discretionary earnings. Pre-tax net income plus interest, depreciation, amortization, one owner’s full compensation and benefits, and discretionary or personal expenses. It assumes an owner-operator buyer who replaces the seller personally.
• EBITDA. Earnings before interest, taxes, depreciation, and amortization. It assumes management stays, or gets replaced at market cost. If you want the mechanics of the metric itself, see what EBITDA is and how to calculate it.
• Adjusted EBITDA, also called recast EBITDA. EBITDA plus defensible normalization add-backs, minus a market-rate salary for whoever actually runs the company.

The cutover sits around $1 million of earnings. Below that, the market prices on SDE. Above roughly $1 million to $2 million of EBITDA, institutional buyers price on adjusted EBITDA and expect a market-rate management salary already deducted. The same company can be described as 3.5x SDE and 5.5x adjusted EBITDA, and both statements can be true. That’s the core of business valuation for exit planning, choosing the right metric and the right comp set before you anchor on a number.

Profitability and growth decide whether you get an earnings multiple or a revenue multiple. Not your industry label. Revenue multiples apply when growth is the dominant value driver and current earnings understate the asset, which is why high-growth SaaS gets priced on ARR while a slower-growing software business gets priced on EBITDA. Pepperdine’s 2025 Private Capital Markets Report found the recast EBITDA multiple was the single most-used valuation method at 76% of respondents, with guideline company transactions carrying the largest weight among methods at 33% (Source: Pepperdine Graziadio Business School, 2025).

What multiples actually look like right now

Treat these as sourced ranges, not as a promise about your company.

• Middle-market private equity buyers. GF Data reported average purchase price multiples of 7.5x trailing twelve-month adjusted EBITDA in Q3 2025, up from 6.9x in Q2 2025.
• The size premium. Across 118 transactions in the $1 million to $25 million enterprise value range during the first half of 2025, GF Data found averages near 5.5x for $1M to $5M, 5.6x for $5M to $10M, and 6.2x to 6.7x for $10M to $25M.
• Software and SaaS. Aventis Advisors, analyzing 543 disclosed SaaS transactions, reported median EV/Revenue multiples of 6.3x in 2021, 2.9x in 2024, 3.8x in 2025, and 3.1x through March 2026, updated April 2026. Founders anchored to 2021 comps are anchored to a market that no longer exists.
• Buyer competition. The IBBA and M&A Source Market Pulse Q1 2026 survey, fielded in April 2026 among 300 advisors reporting 203 closed transactions, found 83% of deals above $5 million drew at least three offers and 18% drew ten or more (published June 30, 2026).

Scale itself buys multiple expansion. A business under roughly $1M of EBITDA usually trades on SDE at a low multiple, while a company clearing $3M to $5M of EBITDA attracts private equity and a materially higher one. Grow adjusted EBITDA from $4 million to $12 million and you pick up more than a full turn on top of the earnings increase. The path you choose changes the comp set too, so if you’re weighing a strategic sale against private equity, an ESOP, or a management buyout, start with the exit strategy pros and cons before you anchor on a number.

Why Are Valuations So Complicated?

Because a valuation isn’t a fact. It’s an opinion of value under a stated standard of value, as of a stated date, for a stated purpose. Change the purpose and the number legitimately changes, which surprises owners who assume one true figure sits inside the company waiting to be measured.

Purpose drives the number

• 409A valuation. Fair market value of common stock for IRC Section 409A safe harbor. It prices a minority, non-marketable interest, so it carries a discount for lack of marketability and no control premium. It’s deliberately conservative.
• Exit or M&A valuation. Fair market value or investment value of a controlling interest, sometimes reflecting what one specific buyer expects to gain by combining the two businesses.
• Estate and gift valuation. Fair market value under Rev. Rul. 59-60, frequently on a minority interest, where the discounts are the entire point.
• Financial reporting valuation. Fair value under accounting standards, such as the buyer’s purchase price allocation after close.

Your 409A is not your exit price. It answers a different question, so it’s worth reading up on 409A valuations rather than assuming your safe-harbor number is your sale price.

Control and marketability move the number as well. A buyer acquiring control can change management, capital structure, and distributions, so control is worth more per share than a minority stake, and practitioners draw that data from the FactSet/BVR Control Premium Study and its database of more than 17,000 transactions (Source: Business Valuation Resources, accessed 2026). Private shares also carry a discount for lack of marketability. The IRS DLOM job aid warns its own examiners against leaning on decades-old restricted stock studies or averaging study results without testing them against the subject company’s facts. For a 100% sale of a control interest to a strategic buyer, neither adjustment typically applies.

Reported earnings aren’t the earnings buyers price

Buyers don’t price GAAP net income. They price a normalized, forward-looking earnings stream, and getting from one to the other is called recasting. It’s where most valuation disputes start.

• Owner compensation. Replace actual pay with a market rate for the role. The IRS Reasonable Compensation Job Aid shows how federal courts and examiners test reasonableness, and buyer-side diligence applies the same logic.
• Related-party rent. If you also own the building, rent gets marked to market in both directions.
• One-time and non-recurring items. Litigation settlements, a failed product launch, PPP-era distortions, a single consulting engagement.
• Discretionary spend. Vehicles, travel, family members on payroll, club memberships.
• Accounting policy differences. Revenue recognition timing, capitalization thresholds, inventory reserves, accrued but unrecorded liabilities.

These arguments are expensive. Pepperdine’s 2025 report found roughly 31% of investment banker engagements ended without a transaction, with the valuation gap the leading cause at 26%, and about 84% of pricing gaps ran 11% to 30% wide (Source: Pepperdine Graziadio Business School, 2025). A gap that size usually isn’t a philosophical disagreement about the future. It’s a disagreement about what the last three years of earnings actually were.

Buyers will commission a quality of earnings report

A quality of earnings report, or QoE, isn’t an audit. It’s a diligence procedure that tests whether reported EBITDA is real, recurring, and repeatable, examining revenue recognition timing, unrecorded expenses, working capital normalization, and the durability of every add-back.

Sellers who bring their own hold up better. GF Data, analyzing 360 transactions completed since Q3 2024, found companies that came to market with a sell-side QoE transacted at 7.4x TEV/EBITDA versus 7.0x for those without one, with the premium concentrated in deals above $50 million in enterprise value. Roughly 90% of private-equity-backed deals include a sell-side QoE. Only about 50% of lower-middle-market founder-led businesses do (Source: GF Data via Middle Market Growth, Fall 2025). Boxwood Partners puts the cost at $30,000 to $100,000 for companies in the $25 million to $100 million enterprise value range, running four to eight weeks (Source: Boxwood Partners, July 2026).

Both sources land on the same timing. Engage three to six months before you launch a process, and if you want the fuller picture of what buyers examine once they’re inside, our walkthrough of due diligence covers the sequence.

The headline multiple isn’t the wire amount

Enterprise value is where the negotiation starts, not where your proceeds land. Subtract debt and debt-like items, adjust for cash, settle the working capital peg, hold back escrow, pay transaction fees, and pay tax. What’s left is net proceeds at close. Anything sitting in an earnout or a seller note isn’t proceeds at close at all.

Most private deals are struck cash-free and debt-free. You keep the cash and pay off the debt, but you deliver a normal level of working capital, and “normal” is a negotiated peg, usually a trailing twelve-month average. Deliver less than the peg and the purchase price drops dollar for dollar. SRS Acquiom’s 2026 study of more than 1,500 private-target acquisitions valued above $385 billion found that working capital adjustments now appear in more than 90% of private-target transactions, up from 50% a decade ago.

Earnouts open the other gap. SRS Acquiom found 24% of private-target non-life-sciences deals in 2025 included an earnout, up from 19% in 2014, and outside life sciences, just over half of deals with earnouts see any payout at all. On cash at close, the IBBA and M&A Source Market Pulse Q4 2025 survey of 350 advisors found sellers averaged 76% to 89% cash at close across deal sizes, published February 24, 2026.

Structure decides what you keep

Two offers at the same headline price are not the same offer.

• Asset sale versus stock sale. In an asset deal, both parties file Form 8594 allocating the purchase price across seven asset classes under IRC Section 1060, using the residual method, with goodwill and going concern value in the final class. The allocation drives seller ordinary income versus capital gain and buyer amortization, so it gets negotiated rather than filled in at the end (Source: IRS, About Form 8594).
• Section 1202 QSBS. The One Big Beautiful Bill Act changed the math in July 2025. For qualified small business stock acquired after July 4, 2025, the per-issuer exclusion cap rose from $10 million to $15 million, the corporate gross asset ceiling rose from $50 million to $75 million, and a tiered exclusion applies at 50% after three years, 75% after four, and 100% after five. Stock acquired on or before July 4, 2025 keeps the prior five-year, 100% rule, and holding periods can’t be restarted to reach the shorter windows (Source: Grant Thornton, 2025 and Perkins Coie, 2025).

Entity choice and QSBS clock management are decisions made years before a sale, not at the letter of intent. Our post on selling your C-corp stock under Section 1202 covers the qualification rules in more depth.

What Can You Do to Maximize Your Valuation?

You can’t move the market, but you can move the risk a buyer prices into your multiple. That’s the whole idea behind how to increase business value before selling, and every driver below shows up in the investment committee memo. None of them get fixed once the data room is open.

The drivers that actually move a multiple

1. Revenue quality and recurring share. Contracted, recurring revenue prices higher than project revenue at identical EBITDA, because it lowers the buyer’s forecast risk. Convert time-and-materials work to retainers and one-year deals to multi-year agreements with auto-renewal, and document retention so you can prove it.
2. Customer concentration. FOCUS Investment Banking reports that any customer above 20% of sales triggers detailed buyer review, some buyers decline outright above 30%, and valuation can fall roughly 20% to 35% where concentration is severe (Source: FOCUS Investment Banking, July 17, 2025). Contract structure is the mitigant. A 30% customer on a five-year auto-renewing agreement is a different risk from the same customer month-to-month.
3. Gross margin durability. Buyers test whether margin is structural or the product of one favorable supply contract, one pricing window, or deferred wage increases.
4. Owner dependence. If you hold the customer relationships, the pricing authority, and the technical knowledge, the buyer is purchasing a job. A second layer of management with documented decision rights raises both the multiple and the cash-at-close percentage.
5. Clean, auditable, accrual-basis financials. Cash-basis books get repriced during diligence. Accrual GAAP financials with a documented monthly close, reconciled balance sheet accounts, and a revenue recognition policy a QoE provider can trace are the difference between defending your EBITDA and losing add-backs one at a time.
6. Legal and compliance hygiene. Signed customer contracts with assignment provisions, IP assignment agreements from every contractor and employee, a current cap table, resolved state nexus and sales tax exposure, and no open worker classification issues.
7. Scale. GF Data’s H1 2025 size bands make the case directly, 5.5x at $1M to $5M enterprise value against 6.2x to 6.7x at $10M to $25M.

The 24 to 36 month runway

Most of these levers need full fiscal years to show up in the financials, so two to three years is the practical minimum.

• Months 1 to 6. Get a baseline valuation. Convert to accrual GAAP if you aren’t there already. Close the books monthly on a defined cycle, clean up the balance sheet, and fix nexus, sales tax, and worker classification exposure.
• Months 6 to 18. Execute. Reduce concentration, convert revenue to recurring, hire or promote the management layer, and separate personal spend from company spend so add-backs become unnecessary rather than merely defensible.
• Months 18 to 30. Produce two to three years of clean, comparable financials under consistent policy. Engage a sell-side QoE three to six months before launch. Model after-tax proceeds under both an asset structure and a stock structure.
• Months 30 to 36. Go to market with a story that reconciles to the general ledger.

The work that raises your multiple happens in fiscal years, not in the data room. Deciding when to start that clock is its own question, and our post on when to sell your business is a reasonable place to begin.

Add-backs that survive scrutiny, and add-backs that don’t

Adjustments that usually survive:

• Owner compensation above market, adjusted to a documented market rate
• Related-party rent marked to a third-party appraisal or a comparable lease
• Genuinely non-recurring legal settlements, with documentation
• One-time relocation, ERP implementation, or rebranding costs, with invoices
• Discontinued product lines with clean segment-level accounting
• Personal expenses that are clearly identified, dated, and individually traceable in the general ledger

Adjustments that usually get rejected or cut:

• “Non-recurring” items that recur in more than one year
• Owner add-backs supported by a schedule and nothing else
• Add-backs for roles the buyer will still have to fill
• Growth investments the business needs to sustain current revenue
• Assumed gains the seller expects the buyer to capture after close
• Any adjustment that first appears after the letter of intent is signed

That last one costs the most. Add-backs discovered late read as negotiation rather than accounting, and they damage credibility on everything else in the file.

How indinero Supports Exit Planning

Indinero supports exit planning by getting the one thing a buyer reprices ready first: your books, closed on accrual-basis GAAP and defensible line by line. A diligence team doesn’t discount clean financials. It discounts messy ones. That’s the whole game in the two to three years before a sale.

Here’s what that looks like in practice.

• CPA-led and GAAP-first. The accounting team maintains accrual books with a documented monthly close and reconciled balance sheet accounts, so a sell-side quality of earnings report confirms your EBITDA instead of turning into a forensic project. Audit-ready, not audit-painful.
• Accounting, tax, and fractional CFO in one engagement. An exit isn’t a bookkeeping question or a tax question. It’s both at once, plus modeling. The same team that closes your books can model after-tax proceeds under an asset structure versus a stock structure and manage the QSBS clock years ahead. Most competitors price each of those separately.
• A partner still standing when diligence starts. indinero has maintained continuous operations since 2009, holds a 5-star Clutch rating, serves 500+ regular customers, and is SOC 2 compliant (2026). A buyer’s team will ask who has been touching the records and under what controls. That answer matters.

Pricing starts at $750/mo, and the engagement scales from monthly bookkeeping into full fractional CFO services as an exit gets closer, so you aren’t switching firms in the middle of a deal.

The valuation conversation should start with the books, because the books are what a buyer reprices. If yours aren’t yet in a state where diligence confirms the number rather than discounts it, accounting services is where that work begins. Reach out for a free consultation. We’d love to learn about your business and where you want this exit to land.

Frequently asked questions

Here are the questions owners ask most often once a sale moves from someday to scheduled.

What’s the difference between SDE and EBITDA when valuing a business?

SDE, or seller’s discretionary earnings, adds back one owner’s full compensation, while EBITDA assumes management stays or gets replaced at market cost. The cutover sits around $1 million of earnings. Below that, buyers price on SDE. Above it, institutional buyers price on adjusted EBITDA with a market-rate salary already deducted. The same company can honestly be 3.5x SDE and 5.5x adjusted EBITDA. At indinero, our accounting and fractional CFO team recasts both so you anchor on the right metric before you go to market.

What EBITDA multiple can I expect when selling my business in 2026?

Middle-market private equity buyers paid an average of 7.5x trailing twelve-month adjusted EBITDA in Q3 2025, though smaller deals trade lower. GF Data found roughly 5.5x for businesses at $1 million to $5 million of enterprise value, rising to 6.2x to 6.7x at $10 million to $25 million. Scale itself buys multiple expansion. SaaS gets priced differently, on revenue, at a median near 3.1x through early 2026. Indinero can produce the clean accrual books those comps get applied against.

What is a quality of earnings report and do I need one before selling?

A quality of earnings report, or QoE, is a buyer-side diligence procedure that tests whether your reported EBITDA is real, recurring, and repeatable. It isn’t an audit, and sellers who bring their own hold up better in a sale. GF Data found companies with a sell-side QoE transacted at 7.4x versus 7.0x without one, running $30,000 to $100,000 to produce. Engage three to six months before launch, and lean on indinero’s accrual books so a QoE confirms your number rather than becoming a forensic project.

How does an asset sale versus a stock sale affect my taxes?

In an asset sale, both parties file Form 8594 to allocate the price across asset classes, which drives seller ordinary income versus capital gain. A stock sale can qualify for Section 1202 QSBS treatment. For qualified small business stock acquired after July 4, 2025, the per-issuer exclusion cap rose to $15 million. Two offers at the same headline price are not the same after tax. Indinero models after-tax proceeds under both structures and manages the QSBS clock years ahead, since tax and accounting sit in one engagement.

Which add-backs will buyers actually accept?

Buyers accept add-backs that are documented and genuinely non-recurring, like above-market owner pay adjusted to a market rate or a one-time legal settlement. They cut items that recur across years, roles the buyer still has to fill, and any adjustment that first appears after the letter of intent. That last one costs the most, because late add-backs read as negotiation rather than accounting. Indinero keeps personal spend traceable in the general ledger so add-backs become unnecessary rather than merely defensible.

How far in advance should I start preparing my business for sale?

Start preparing 24 to 36 months before a sale, because the levers that raise your multiple show up in fiscal years, not the data room. The first six months set a baseline valuation and convert the books to accrual GAAP. The middle stretch reduces customer concentration and builds a management layer. The last year produces two to three years of clean, comparable financials and a sell-side QoE. Indinero has maintained continuous operations since 2009, so the same partner is still standing when diligence starts.