Key Takeaways
- A buyer's first number is the anchor: the multiple at which similar-sized companies in your industry actually sold recently, not a number you heard at a conference.
- Five lines move that anchor: profit size, who earns the profit, customer concentration, how much revenue recurs on its own, and the cost of maintaining profit.
- One line can take a company off the table entirely. If the owner is the company, the other four lines stop mattering.
- Customer concentration above 30% from a single client lowers the range regardless of how loyal that customer is.
- Running personal expenses through the business to cut taxes quietly lowers the profit line that gets multiplied on the day of sale.
- Work the five lines backward two to three years before the teaser goes out, and the buyer's range can reach your number.
How a PE buyer values a company in five minutes
A private equity buyer values a company in about five minutes by starting with an anchor multiple and then adjusting it up or down based on five indicators. The anchor is the multiple at which similar companies of roughly the same size sold over the past year or two in the same type of business. Then five lines in the one-page summary move that number. Two of those lines are about profit; three are about what can take the profit away.
I spent about 20 years in private equity and bought 10 companies. Before I ever called a broker, I read a two-page document called a teaser, the summary a broker sends out before the owner's name is revealed. I read the same five lines in every one, and I roughly calculated the number in my head before I picked up the phone.
The key difference between how owners and buyers think is where the first number comes from. The owner usually starts with a number he heard somewhere, a friend's deal, or the amount he wants to walk away with. The buyer starts with a list of real, closed transactions. Learning to read your company the way a buyer reads it is simple, and it changes what you do with your next three years.
The anchor: where the first number really comes from
The anchor is the multiple at which similar companies of similar size recently sold, and it sits in front of a buyer before he reads a single line of your teaser. It is built from actual sales that closed at a known price in the same type of business, not from rumor.
Here is the part owners miss: the owner relies on history he heard about, and the buyer relies on a list. Every serious buyer looking at your company opens roughly the same list. So when three buyers consider the same business, they usually start within one 'turn' of each other, where a turn is one point on the multiple, say five times profit versus six.
Two companies in the same industry with the same profit can still get different starting ranges. One might start right at the anchor; the other might start lower before a single call is made. The anchor is only the opening point. The real question is what moves it.
The two profit lines buyers read first
The first two of the five lines are about profit: how much there is, and who actually earns it. These are the lines most owners expect a buyer to care about, but one of them is where deals quietly die.
Line one is profit and the revenue it comes from. Some funds will not touch a company below a minimum revenue or profit threshold, because they invest other people's money and have rules. I don't love that logic, but you should know it exists because it decides who even shows up to negotiate. Thin profit inside a large company is its own problem, because one bad year can wipe it out.
Line two is who earns the profit: who sells, who sets pricing on orders, and who the biggest customers actually call. If the general manager is on the first page and a sales team handles customers, this line is stable and the anchor holds. If the owner personally prices every order and every customer only knows him, this line pulls the anchor down before I learn anything else. The teaser always says the owner will stay for a transition. I want to know what falls apart the day he leaves.
The three lines that measure what can take profit away
The last three lines measure risk: customer concentration, how much revenue recurs on its own, and the cost of keeping profit where it is. A strong line holds or lifts the anchor; a weak line drops it; a line I can't put a number to makes me pass on the company.
Line three is the share of revenue tied to your single largest customer. More than 30% from one client is usually a serious problem, no matter who that client is. Owners tell me the customer has been loyal for 15 years and will never leave, and I believe them. It still doesn't change the score, because the price reflects what happens if we are both wrong.
Line four is how much revenue returns on its own. Some work has to be won again every year, like a construction company bidding each new tender, so a great year tells me nothing about the next one. Other revenue recurs automatically through contracts or annual maintenance plans. Because a buyer usually borrows to buy the company and must make loan payments even in a bad year, more recurring revenue lets the range sit higher.
Line five is the cost of maintaining profit: the trucks and machines a company must replace just to keep from shrinking. Real profit is the number after that spending, and the teaser almost never shows it. If a $2 million profit requires a million a year in new machines, there was never $2 million on line one.
Three teasers, three very different outcomes
To make the five lines concrete, here are three companies that crossed my desk, with names changed. The lesson: more profit does not guarantee a higher range.
First, a home services company: $16 million revenue, just over $3 million profit. Line one is strong, about 20 cents of profit on every dollar, enough to survive a bad year. The general manager is on the first page, and two non-owners handle sales. The largest customer is 12%. About 70% of revenue is recurring annual service that renews automatically. Equipment is trucks and hand tools. The only open question was whether the general manager would stay, so line two carried a question mark. The range started at the anchor and rose a point if the manager stayed. I called that same afternoon.
Second, a manufacturer: $18 million revenue and $6 million profit, nearly double the first company, yet it got a lower range. The owner founded the business and still runs sales, so lines two and three collapsed into one: a single customer worth 35% of revenue that the owner personally handles. Line four is project work won one contract at a time. The range started a full point below the first company's range and ended where the first one began, with part of the price deferred and tied to whether the profit survives a year after sale.
Third, a construction company: $30 million revenue, $4 million profit last year but only $900,000 two years earlier on similar revenue. The owner is the estimator, and every developer calls only him. He is the company. Line two took the other four down with it, even the good ones, because the day he leaves, the pricing and relationships leave with him. It's a good company that no one can value today, and I never called.
Why the owner's number kills the deal, and how to fix it
Almost every owner brings a number to the first call that is one or two points above the top of my range, and he states it as if it were the anchor. From my side of the table, that number tells me how the whole negotiation will go before we discuss a single point. The buyer says he'll get back to you and never does, not out of a lack of interest, but because arguing today accomplishes nothing and can ruin a relationship that might produce a deal, or a referral, in three years.
What the owner wanted was a range, and the way to get one is to ask buyers about it years before an offer is on the table. Buyers will tell you what moves their number, line by line, when there's nothing at stake.
Two habits quietly lower that number. First, customer concentration: fix it by intentionally handing your biggest customer to someone else on the team while you're still there, and by adding enough new customers that the top client drops below 30%. That's about two years of work, and it is the gap between the two ranges in my manufacturing example. Second, running personal expenses through the business. A $10,000 'advertising' family trip saves about $4,000 in taxes at a 40% rate, but at a five times multiple it removes $50,000 from your price, because every dollar you strip off profit gets multiplied. Add-backs don't save you, because a buyer's accountants only add back what they can verify, and a family trip labeled as advertising is not verifiable. A long list of add-backs just looks like a smaller company with a story.
So the homework is the napkin itself. Work backward: divide your desired price by a realistic multiple to find the profit you need to show. Identify which of the five lines lowers your multiple today, with specifics, the customer's name and the type of work. Decide how long the business must look that way, usually two to three years, because two good years look like a business and one looks like luck. Then go to market the year after. Do the same analysis on a competitor who sold last year, because that sale is now on every buyer's list. If you want the buyer's range to reach your number, your napkin has to reach it first.
The Bottom Line
A buyer values your company by starting with an anchor, the multiple similar companies actually sold for, and then moving it with five lines: how much profit there is, who earns it, customer concentration, how much revenue recurs on its own, and the cost of maintaining profit. More profit does not win if one line, usually the owner being the business, takes the rest down with it. You can't change the anchor, but you can change every one of the five lines, and the time to do it is two to three years before the teaser goes out, not on the first call.
Book a Free Strategy Session →Frequently Asked Questions
What is the 'anchor' in a business valuation?
The anchor is a buyer's first number: the multiple at which similar companies of roughly the same size sold in the same industry over the last year or two. It's based on actual closed deals, not on a number you heard at a conference. Every serious buyer opens your teaser with roughly the same list, which is why their starting points usually fall within one point of each other.
Why does a company with higher profit sometimes get a lower valuation?
Because profit is only one of five lines a buyer reads. A company with double the profit can still get a lower range if the owner personally runs sales, one customer is 35% of revenue, and the work is project-based with nothing recurring. In that case the risk lines pull the multiple down below a smaller, cleaner company's multiple.
How much customer concentration is too much when selling a business?
More than 30% of revenue from a single customer is usually a serious problem, no matter how loyal that customer is. The buyer prices in the risk that the customer leaves whether or not anyone expects it to happen. The fix is to intentionally transition that relationship to your team and add enough new customers that the top client falls below 30%, which takes about two years.
Why do personal expenses run through the business hurt my sale price?
Because the profit line is what gets multiplied. A $10,000 personal expense disguised as a business cost might save $4,000 in taxes, but at a five times multiple it can remove about $50,000 from your price. Buyers only add back expenses their accountants can verify, so a family trip labeled as advertising stays subtracted and makes the company look smaller with a questionable story.
What takes a company completely off a buyer's table?
A line the buyer can't assign a number to, most often an owner who is the entire business. If the owner is the estimator, the salesperson, and the only person every customer calls, then the day he leaves the pricing and relationships disappear with him. That single line pulls down even the good lines, and the buyer passes rather than guess at a price.
How far in advance should I prepare my business for sale?
Plan for two to three years before the teaser goes out. Two strong, stable years look like a real business; one good year looks like luck. Work backward from your target price to the profit you need, fix the specific lines that lower your multiple, hold that performance for two to three years, and go to market the year after the improved numbers are clear in your financials.
