The Number on the Check

A couple of Christmases ago I was standing by the shrimp tray at a party when a buddy of mine, I’ll call him Rick, got cornered by a business broker.

Rick owns a commercial cleaning company. Good one. Fourteen years, about forty employees, contracts with office parks all over town. The broker asked him the question every owner secretly loves hearing.

“So what do you think it’s worth?”

Rick didn’t even blink. “Two million. Easy.”

The broker smiled the way a doctor smiles before he tells you to sit down. Then he asked three questions.

“What did it clear last year after you pay yourself a normal salary?”

“How much of your revenue comes from your top three customers?”

“Could a bank verify all of that from your tax returns?”

Rick had a rough answer for the first one, a bad answer for the second, and no answer for the third. A month later he sat down with that broker for real. The honest number was a little over $700,000.

Rick doesn’t have a bad business. He has an unpriced one. He’d spent fourteen years building something and never once looked at it the way a buyer would.

Most of you are Rick. Today we fix that.

On October 20, BizBuySell released its Q3 2026 Insight Report, and it says something every owner should hear.

Fewer businesses are selling. A total of 2,132 changed hands in the third quarter, down 7 percent from last year. But the ones that sold went for a lot more. The median sale price hit $350,000, up 17 percent.

That’s not because every business got more valuable. It’s because buyers got picky. Here’s the split that matters, from the full breakdown on Small Business Trends:

Same market. Same quarter. One group gets a bidding war and the other group gets talked down.

And the buyers are out there. The single biggest complaint from buyers wasn’t financing or price. It was that they can’t find enough good businesses to buy. Service businesses led the whole market with 992 sales, up 9 percent from last year and the highest number since the spring of 2022.

There’s one more piece. Most buyers in this range use SBA loans, and the report points to tighter SBA underwriting that took effect October 1, with deeper reviews of valuation and earnings. Certain SBA financed deals of $3 million or more now need an outside quality of earnings report. Translation: a lender is going to put your books under a microscope. Whatever you can’t prove doesn’t count.

So the market is telling you exactly what it pays for. Proof. Predictability. A business that doesn’t fall apart when you walk out the door.

I can hear some of you already. “Marcus, I’m not selling. I’m keeping this thing until they carry me out.”

Fine. Know the number anyway.

Your business is probably the biggest asset you own. You’d never go ten years without knowing what your house is worth or what’s in your 401(k). But most owners have never once run the math on the thing that pays for both.

And the number shows up whether you plan for it or not. A partner wants out. You get hurt and can’t work for six months. A bank wants to know what your collateral is worth. Your estate attorney asks what your kids are inheriting. A competitor calls with an offer on a random Tuesday and you have no idea if it’s good.

The number is a scoreboard. It tells you whether all those sixty hour weeks are actually building something or just paying the bills.

Here’s how most small businesses get valued.

Earnings times a multiple equals value.

That’s it. You can make the business more valuable two ways. Make more money, or make the money you already make worth more to a buyer.

Almost every owner spends 100 percent of his energy on the first one. The second one is where the easy money is hiding.

For most businesses selling under a few million dollars, brokers use something called Seller’s Discretionary Earnings, or SDE. Think of it as the total cash the business throws off for one owner who works in it full time.

You build it like this. Start with the net profit on your tax return, then add back:

Let’s run Rick’s numbers the way the broker did.

That’s $319,000 in SDE.

Now the rule nobody tells you. Every add back needs a receipt. A buyer and his lender will look at each one and ask you to prove it. The legal settlement? Show the invoice and the settlement letter. The truck? Show it’s titled to the company and your wife drives it to Pilates. If you can’t document it, assume it gets thrown out.

And the big one. If you’ve been running cash that never touched your tax return, I’ve got bad news. Lenders lend on tax returns. A buyer is not going to pay you a multiple on money you swore to the IRS you didn’t make.

Here’s the math that should change how you look at your books. Say you bury $50,000 of profit to save maybe $15,000 in taxes. At a 3x multiple, you just cost yourself $150,000 at the closing table. I’m not your CPA and your situation is your situation, but that trade is worth a real conversation with the person who signs your return.

The market averages are the starting point. About 2.3 times for businesses under $1 million in price, about 3.7 times for the bigger ones. Your industry will move that around, and a good broker can tell you the range for your space.

But what moves your number inside that range is a short list of things buyers care about. Score yourself honestly on each one.

Customer concentration. If one customer is a big slice of your revenue, a buyer sees a business that could lose a huge chunk of its income with one phone call. Rick’s top three customers were 41 percent of revenue. That alone knocked his multiple down.

Recurring revenue. Contracts, retainers, maintenance plans, subscriptions. Money that shows up next month without anybody having to sell anything. Buyers pay a premium for it every single time.

The trend. Three years of steady growth beats one great year after two flat ones. Buyers pay for direction, not just size.

Clean books. Monthly financials that tie out to the tax returns. No “we’ll sort it out at year end.” Messy books don’t just lower your price. They kill deals in due diligence.

Owner hours. How much of the business still runs through you? We spent a whole edition back in July on pulling yourself out of the machine, so I won’t repeat it. Just know that it shows up right here, as a number.

Contracts that transfer. Written customer agreements. A lease with renewal options that can be assigned to a new owner. Key employees who aren’t going to walk the day you announce a sale.

Now look at what one turn of the multiple is worth. At 2.3 times, Rick’s business is worth about $734,000. At 3.0 times, it’s worth $957,000.

Same revenue. Same profit. Same Rick. A $223,000 difference, and most of it comes from things he can fix in a year.

Here’s where I’d put my energy over the next twelve months.

1. Get your books buyer ready. Monthly close, reconciled accounts, personal and business money fully separated. If your bookkeeper is three months behind, that’s the first fire to put out. Ask your CPA what it would take to get reviewed financial statements next year. Buyers trust what someone else has checked.

2. Cut the concentration. No single customer should be able to sink you. If one client is more than 15 or 20 percent of revenue, your sales goal for 2027 isn’t “more revenue.” It’s more customers. Go land five or six mid sized accounts so the big one shrinks as a percentage.

3. Turn one time work into recurring work. Every service business has a version of this. Maintenance agreements. Quarterly service plans. Monthly retainers instead of project fees. Even moving 20 percent of your revenue to recurring changes how a buyer reads the whole business.

4. Prove you’re replaceable with data, not a story. One of the first things a serious buyer asks is how many hours you work and what you spend them on. Most owners guess, and they guess low. I track mine automatically with Rize, which runs in the background and shows exactly where my day went. Run it for a month and you’ll know which parts of the business still depend on you. That’s your to do list. It’s also the report you’ll hand a buyer someday instead of a shrug.

5. Paper everything. Customer contracts in writing. Employee agreements in writing. A lease that can transfer. A list of your vendors and what you pay them. A one page org chart with who does what. None of this is exciting. All of it is worth money.

Here’s the move that separates the guys who get top dollar from the guys who get talked down. Build the file now, years before anybody asks for it.

Put this in one folder and update it every quarter:

When a buyer, a lender, a partner, or your estate attorney asks for it, you hand it over the same day. That alone tells them everything about how you run the place.

“I’m not selling for ten years.”

Perfect. Then you’ve got ten years of compounding. Every improvement you make now gets paid for twice. Once in higher profit every year you own it, and again in a higher multiple the day you don’t.

“My accountant handles all this.”

Your accountant’s job is usually to make your taxable income as small as legally possible. A buyer wants the exact opposite. Those two goals pull against each other, and you’re the only one who can decide where the line is. Have that conversation on purpose.

“Brokers always say your business is worth more than it is.”

Some do. That’s why you run the numbers yourself first. Walk into that conversation already knowing your SDE and your honest multiple, and nobody can blow smoke at you.

“This sounds like a lot of work.”

It’s about three hours to get your first real number. Pull a tax return, build the recast, score the multiple. You’ve spent more time picking a new truck.

Before Friday:

Then multiply your SDE by 2.3 and by 3.5. Look at the gap between those two numbers. That gap is what your next year is worth if you do the work.

Wednesday we’re talking about something that’s quietly slipping away from most of the men reading this, and you probably won’t notice until somebody you love gets tired of repeating themselves.

Refined. Relentless. Unapologetic.

Marcus