Every owner has a number in their head. Sometimes it comes from a rule of thumb heard at an industry event, sometimes from what a competitor supposedly sold for, and sometimes from what the owner needs for retirement. None of those are valuations. Here is how the value of a private Michigan business is actually determined — and why two businesses with identical revenue can sell for very different prices.
Buyers pay for earnings, not revenue
The first mental shift: private businesses are priced primarily on profit, not sales. A company with $3 million in revenue and thin margins will typically be worth less than a company with $1.5 million in revenue and strong, consistent earnings. Revenue matters, but it is the earnings that a buyer is actually purchasing.
SDE versus EBITDA — and why the difference matters
For owner-operated businesses, the standard earnings measure is Seller's Discretionary Earnings (SDE). It starts with your net profit and adds back your own salary and benefits, interest, depreciation, and genuinely one-time or personal expenses that ran through the business. SDE answers the question a small-business buyer is really asking: "If I own and run this business, what does it produce for me in total?"
For larger businesses — generally those with a management team that stays after the sale — buyers use EBITDA, which does not add back a manager's salary, because the buyer will still have to pay someone to run the company. The same business can look dramatically different under the two measures, and using the wrong one is the most common reason owner expectations and market reality diverge.
The add-back conversation
Recasting your financials — identifying legitimate add-backs — is where valuations are won and lost. A defensible add-back is one you can document and a buyer's lender will accept: your salary, a one-time legal settlement, a family member on payroll who does not work in the business. An indefensible add-back is wishful thinking: "the business would earn more if I worked harder." Experienced advisors recast conservatively, because every add-back will be tested in due diligence, and a valuation that collapses under scrutiny is worse than a modest one that holds.
What moves the multiple
Once earnings are established, buyers apply a multiple — and the multiple is where the qualitative story of your business gets priced. Factors that push multiples up: earnings that are stable or growing across three or more years; a broad customer base where no single customer dominates revenue; documented processes and a team that can operate without the owner; clean, accountant-prepared financial statements; and a transferable lease or owned real estate. Factors that pull multiples down: heavy dependence on the owner's personal relationships or licenses; customer concentration; declining revenue; informal bookkeeping; and deferred maintenance or aging equipment.
This is why preparation time matters so much. Most of the factors above can be improved in one to three years — and improving the multiple often adds more to your final price than any negotiation will.
Why Michigan context matters
Valuation is comparative: your business is measured against what similar businesses actually sold for. National rules of thumb miss local reality. Michigan's buyer pool is deep in manufacturing, skilled trades, distribution, and B2B services, and demand from individual buyers, strategic acquirers, and private equity varies by sector and region — Southeast Michigan, West Michigan, and the Lansing corridor each behave a little differently. A valuation grounded in comparable Michigan transactions will always be more defensible than a generic formula.
What a professional valuation involves
A proper opinion of value includes: recast financial statements for the last three years, selection of the correct earnings measure, analysis of comparable completed transactions, adjustment for your specific risk factors and growth story, and a realistic range — not a single flattering number. It should also tell you what you could change to be worth more, which for owners not yet ready to sell is often the most valuable page in the report.
Know your number before you need it
The best time to get a valuation is before anything forces the question — before the unsolicited call from a buyer, before the health scare, before the partnership disagreement. Owners who know their number make better decisions about everything: when to sell, what to fix first, and whether that surprise offer is generous or opportunistic. The conversation is confidential, and there is no obligation attached to knowing where you stand.