When selling your business, understanding valuation is critical to setting realistic expectations and negotiating effectively. Your selling price is determined through established methodologies that buyers will use to assess value. This guide outlines the two core approaches to valuation and the key value drivers that determine where your business falls within industry multiples.
Two Core Valuation Approaches
Professional buyers typically use two methods that should align closely to determine a fair market value:
1. Industry Multiple Method
This approach applies industry-standard multiples to your adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Industry norms vary by sector and this should be information that interviews with potential investment bankers should yield. Some broad ranges:
- Non-franchise multi-site service with low to mid capex: 4-8x range
- Technology SAAS 15-30x
- Franchise Brands
- Food Franchises: 15-22x EBITDA
- Service Franchises: 10-17x EBITDA (most fall in the 10-13x range)
- Service Sectors with Strong Tailwinds: 13-17x range
Important Note: Adjustments to EBITDA are far more discounted today than in 2022 due to higher interest rates and heartburn from firms that overpaid in 2021-2022. Buyers are more conservative in accepting add-backs and normalizations to your financials. Expect no more than 10-20% allowed in add-backs.
2. Discounted Cash Flow (DCF)
This method projects your next 5 years of cash flows based on historical growth rates, then discounts those future cash flows back to present value. In a DCF you use the present value of the cash flows from the explicit forecast period and then add a terminal value to represent everything after your explicit forecast period (the terminal value may represent 50-65% of the DCF which is why most buyers scrutinize it heavily). DCF should produce a valuation range that’s narrow compared to the EBITDA multiple method, serving as a validation check.
Example: If your business has grown from $4M to $5M to $6M in revenue historically, you would project forward based on that trajectory and then discount those projected cash flows back to today’s dollars.
When both the industry multiple method and DCF produce similar ranges, you have a reliable valuation foundation for negotiations.
Key Value Drivers That Impact Your Multiple
Not all businesses at the same EBITDA level receive the same multiple. The following factors determine where you fall within the industry range:
Business Stage & Financial Performance
- Demonstrated profitability with a proven track record of growth
- Most recent EBITDA (e.g., $15M in 2025) serves as the baseline for valuation
- Consistent, reasonable growth trajectory based on recent performance
Unit Economics & Growth
- Growth rate in number of units across your system
- Available whitespace for continued development
- Average Unit Volume (AUV) growth at the unit level
- Strong 4-wall unit profitability at the store level
System Health Metrics
- For franchise system, high franchisee satisfaction and validation scores
- Strong end-customer Net Promoter Score (NPS)
- Effective labor recruitment and retention rates
- Favorable competitive positioning (supported by competitive analysis)
Scalability
- For Franchisors there should be EBITDA scalability — beyond $200M in system-wide sales, the franchisor should deliver 75% of incremental royalty dollars to the bottom line
- Sustainable top-line revenue growth
- Bottom-line EBITDA margin expansion as the brand/system scales
The Bottom Line
A healthy, growing brand/system with strong unit economics, satisfied franchisees/customers, and scalable profitability will command the higher end of industry multiples. Buyers pay premium prices for businesses that demonstrate consistent performance across all these dimensions.
Your goal as a Founder preparing for exit should be to strengthen these value drivers well before going to market—ideally 12-24 months in advance. By focusing on these factors early, you position your brand/system to achieve maximum valuation when the time comes to sell.
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