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Episode Summary
Someone emails you tomorrow saying they want to buy your company for three million dollars. Is that a great deal or are you getting robbed? Most owners freeze because they have no language for the question, so they don’t answer at all. Your CPA does taxes. Your banker manages the line. Your wealth manager scribbles a number on a personal financial statement that turns out to be three times what would actually hit your bank account. Nobody is putting a stake in the ground that says your business is worth this today and this in five years. Pat Hobby and I sat down to break the myth that you can’t know what your company is worth until a buyer writes a check. We got into the three numbers every owner-operator should be tracking monthly: Normalized EBITDA, the multiple your industry and risk profile actually justifies, and the waterfall from enterprise value down to net proceeds (the number that actually hits your bank account). Real example from a client who thought his business was worth $7M, ran it through the math, and walked with $2.5M after debt, taxes, and deal costs.
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## Top 10 Takeaways- Waiting for a buyer to tell you what your company is worth is how owners stay blind for a decade.
- Value is the risk profile of your future cash flow. Sustainable, predictable, transferable cash flow earns the higher multiple.
- Two customers at 80% of revenue and a competitor with no concentration are not worth the same thing.
- Reported EBITDA is the math off your statements. Normalized EBITDA is the cash flow a new owner would actually inherit.
- Owner perks, family on payroll, and one-time website builds come back as add-backs to normalize EBITDA.
- Underpay yourself as CEO and your EBITDA is lying. Normalize the salary to market or the math is fiction.
- The multiple is the number of years of cash flow a buyer will pay for. Your risk profile drives it.
- Enterprise value minus debt is equity value. Equity value minus taxes and deal costs is what hits your bank account.
- If you put enterprise value on your personal financial statement and ignore the debt behind it, you’re lying to yourself.
- Three levers move value: grow normalized EBITDA, expand the multiple, pay down debt. That’s the entire private equity playbook.
Sound Bites
“I’ll never know what my company’s worth until someone way down the road is willing to write me a check. I hear that all the time and it’s total BS, because you can absolutely measure and monitor and track the value of your business while you own it without even having to sell the company.” (@TBD) — Ryan Tansom
“The more your cash flow are those three things, sustainable, predictable, and transferable, the more your company’s worth.” (@TBD) — Pat Hobby
“The multiple represents the number of years of normalized EBITDA somebody’s willing to pay you for your business.” (@TBD) — Pat Hobby
“You could have built a company that has a tremendous amount of enterprise value, but it’s taken a huge amount of debt to get there, so your equity value is not where it should be. And you need to know that.” (@TBD) — Pat Hobby
“We had a client that had that. When he had the $7 million on there, it was overstated by about almost three times.” (@TBD) — Pat Hobby
About This Episode
Pat Hobby is Ryan’s business partner at Arcona and a CFO who has worked both sides of M&A transactions and inside ESOP-owned companies running annual valuations as a matter of law. This is part one of a three-part series demystifying business valuations, setting up conversations with Dave Deal of Prairie Capital (the financial-buyer perspective on ESOPs and management buyouts) and Ted Schluter & Eric on branding a company for a third-party buyout. Pat and Ryan introduce the foundational vocabulary every owner needs before any of the later episodes land: intrinsic vs. strategic value, normalized EBITDA, the multiple, and the enterprise → equity → net proceeds waterfall.
Resources Mentioned
- Arcona — Ryan and Pat’s firm and the home of the Intentional Growth Financial Assessment. — arcona.io
- Intentional Growth Financial Assessment — 22-question assessment; results page walks through five videos showing what good financials look like. — arcona.io
- Pepperdine Private Capital Markets Project — Referenced as a public source for multiples by industry and size.
- Prairie Capital Advisors (Dave Deal) — Teased for the next episode on financial buyer perspective.
Connections
Phase + Module:
- Module 2 — Expand Knowledge — Building the financial fluency every owner needs before they can run the business as an asset
Milestones:
- Milestone 4 — Owner’s Value (DCF) — The intrinsic value of your cash flow as it exists today
- Milestone 5 — Market Value — Industry, size, and risk-driven multiple range
- Milestone 9 — Monthly Ownership Meetings — Where the value calculation gets reviewed every month
- Milestone 10 — Three-Statement Model — The financial foundation that makes the whole calc possible
Concepts referenced:
- Normalized EBITDA — Reported EBITDA after add-backs for owner perks, one-time costs, and salary normalization
- The Multiple & WACC — Years of cash flow a buyer will pay, driven by risk
- Enterprise Value vs. Equity Value — The waterfall from headline number to bank account
- Free Cash Flow — What normalized EBITDA is a proxy for
- The Four Value Levers — Where the “grow EBITDA, expand multiple, pay down debt” levers live
- Monthly Owner’s Package — Where enterprise, equity, and net proceeds estimates should be tracked monthly
- Value Gap — The space between what owners think they’re worth and what would actually hit the bank account