An owner once slid a single sheet across the table to me with a number on it, circled twice. He'd taken last year's earnings, found the multiple range his sector was trading at, and picked the middle of the range because he thought of himself as a modest man. The arithmetic was faultless. The number was about forty per cent too high, and in that moment neither of us could have told you precisely where the forty per cent went.
I can tell you now, because I've since sat on the other side of that table and built the number that came back. It is not one judgement. It is four, and they're made separately, in a particular order, and each one has its own arithmetic.
Here's the thing the sector range actually means. It's what businesses like yours trade at when they transfer cleanly. It already assumes the thing you haven't proved. So it is not your starting point, it is your ceiling, and everything from here is subtraction.
The first cut: how much of the deciding is you
Not the working. The deciding.
A buyer is trying to establish how many operating decisions route through one person in a normal month, and what happens to the tempo of the business when that person is unreachable for a fortnight.
Then they price it, and this is the part almost nobody sees coming: they price it whichever of two ways is worse for you.
If the function is replaceable by hiring somebody, they price it as a hire. A general manager on $240,000 including on-costs comes off your earnings, permanently, before any multiple is applied. On a five times multiple that single line has taken $1,200,000 off the price, and it never appears as a discount. It appears as a correction to your profit, which is much harder to argue with, because it is one.
If the function isn't replaceable by hiring somebody, that's worse. Then it comes off the multiple instead, and it comes off harder, because now they're not buying a business with a vacancy. They're buying a business with a dependency they can't resolve with a job advert.
Most owners assume they're in the second category and are quietly flattered by it. Most are in the first. The ones who are genuinely in the second are the ones with the real problem.
The second cut: whose name the money is actually in
Concentration first, because it's arithmetic and it's quick.
Take your top five customers by gross profit, not by revenue. Revenue flatters concentration and gross profit tells the truth. If one of them is above twenty per cent, you're into the territory where a buyer stops thinking about growth and starts thinking about survival. Above fifty per cent, you don't have a business, you have a contract, and it's a contract somebody else can cancel.
I've walked away from a professional services firm where a single client was more than sixty per cent of billings. The business was well run and genuinely profitable. It was not ownable.
Then the harder question underneath the arithmetic, one customer at a time: would that relationship take a call from somebody who isn't you?
You'll want to answer yes. Test it properly. When did that customer last have a substantive conversation with anyone else in your business. Not a delivery call. A pricing conversation, a complaint, a renewal. If the honest answer is that those all come to you, then that revenue isn't contracted to the business, it's lent to it, and the lender is you.
The third cut: what only exists in one head
This is the one that gets priced most violently, because it's the one with no fallback.
Every business has some knowledge that lives in one person. The question a buyer is asking is whether any of it is load-bearing. Can the business quote accurately without that person. Can it price a non-standard job. Does it know why the second-largest supplier gets terms nobody else gets.
Where the answer is no, the business can lose a material part of its capability on a single day's notice, and a buyer prices that not as a discount but as a condition. Retention obligations. Deferred consideration. Sometimes a walk-away, and the walk-away is often the rational move.
The fourth cut: whether it's written down
The cheapest of the four to fix, and the one most consistently ignored.
If the answer to "how is this actually done" is "ask him", then it's the first cut wearing different clothes. The reason it gets its own line is that it's the only one of the four you can materially improve inside a quarter, without hiring anyone, without losing a customer, and without changing what you're good at.
Now run the rough version
You can get to an uncomfortable number in about twenty minutes.
Start at the middle of your sector's range. For each of the four cuts, mark yourself honestly: none, some, or substantial. Be strict, because the buyer will be. Then take roughly half a turn of the multiple off for each "some" and a full turn for each "substantial".
Do the arithmetic on your own earnings. On a business earning $1,600,000, a single turn is $1,600,000. Two substantials and a some, which is an entirely ordinary result for a well-run owner-operated business, is two and a half turns. That's four million dollars, and it is not a negotiating position. It is the buyer's honest read.
The number you get will be wrong. It'll also be close enough to tell you whether you have a problem, which is the only thing this exercise is for.
What roughly is worth, and what it isn't
Roughly is enough to know. It is not enough to fix.
Two reasons. The first is that the cuts interact, and not gently. Undocumented process and decision-dependency compound, because a buyer reading both together stops treating them as two manageable issues and starts treating them as one cultural fact about the business. The second is that you're marking your own paper. A buyer prices the worst defensible reading of each cut, not the fair one, and they do it with a spreadsheet and no emotional stake in the answer.
So the number you just produced is your floor for optimism, not your valuation.
But you now know something most owners never find out until the meeting where it's far too late to act on it, which is where the money went. It did not go anywhere. It was never there, and the sheet with the number circled twice on it was measuring a different business to the one you own.
Paul Lange advises owners and senior leaders on the decisions that define commercial outcomes and organisational character, and on what a business is worth the day it changes hands. He has spent close to four decades across finance, technology, hospitality, professional services, and operating roles, in Europe, Asia, the Middle East, and Australia, on both sides of the table, from first investment to final sale, with private equity and venture capital one part of it, and has taken five of his own companies through to exit. He is the creator of the Total QX™ and TILE Theory™ frameworks, and the author of The 20% Leader, Mis(très)s Entrepreneur Manifesto, Evolve or Be Remembered, and The Inheritance Manifesto. He runs his advisory practice, Manolutions, from the Gold Coast, Queensland. He writes Yes. Know. Deal. because price is negotiable; what you understand before you sign is not.