Where the Number Comes From, and Why Most of Them Cannot Be Defended

A defensible view of value is not the same thing as a confident one. Most owners arrive with a number. Almost none can say where it came from.

Methodology matters, and there are whole books on it. What matters at least as much, and gets far less attention, is current evidence: what companies like yours are actually selling for right now, to buyers like the ones who will look at you. Methodology without evidence produces a number you cannot defend in a room. Evidence without methodology produces a number you cannot explain.

Why the evidence is hard to get

Transactions between private companies are private. Nobody is required to publish the price and most of the time nobody does.

That is the entire difficulty, and it is why owners end up relying on a figure a competitor mentioned at a trade show. The number a competitor says they turned down is unverifiable, probably inflated, and quite often a number they were never actually offered.

The real sources, and what each one is not

Databases of completed transactions, built from deals reported voluntarily by the advisors who closed them. DealStats covers mid-sized companies and reports both asset and stock sales, with EBITDA and seller’s discretionary earnings; its reporting typically lags a closing by six to twelve months. BIZCOMPS covers smaller businesses, reports seller’s discretionary earnings rather than EBITDA, includes asset sales only, and some of its records are decades old. PeerComps is built from transactions financed under the federal small-business loan programs, which makes it a clean dataset of a specific slice.

Private equity deal data. GF Data reports multiples on middle-market transactions with private equity sponsors, by transaction size. PitchBook covers private capital markets broadly. Both describe a sponsored-deal universe, which is the right comparison for some companies and the wrong one for others.

Advisor surveys. The Market Pulse survey reports what advisors are seeing each quarter. That is sentiment and practice rather than transaction data, and it is useful for direction rather than for pricing.

Public acquirers and trade associations. Public buyers disclose, and associations sometimes collect member data. Both are worth checking and neither will be numerous enough alone.

The mistake that makes all of it useless

These sources measure different things, and you cannot average them.

Seller’s discretionary earnings is not EBITDA. SDE adds the owner’s compensation back; EBITDA does not. A three-times multiple of SDE and a three-times multiple of EBITDA describe two completely different prices for the same company, and the definitions of SDE are not even consistent between databases, which is why one publisher explicitly warns against combining its data with anyone else’s.

An asset sale price is not a stock sale price either. In an asset sale the buyer typically does not take the cash or the debt, so the headline means something different.

And the databases overlap. Several are populated by the same advisors reporting the same transactions, so a sample that looks like forty comparable deals may contain the same twelve counted more than once.

A number built by blending incompatible sources looks more rigorous than a guess and is frequently less accurate than one.

Three questions to ask whoever hands you a valuation

Which source did each comparable come from. Which earnings definition does it use. Were those deals asset sales or stock sales.

Somebody doing the work answers all three instantly. Somebody who is not is quoting you an average of things that do not belong in the same column.

Why it gets paid for twice

An owner who goes to market without a defensible view pays at the start and again at the end.

At the start, because a price set too high attracts no serious interest and a price set too low is accepted immediately, and both outcomes look identical from the inside: quiet. Months pass and the owner learns nothing from either, because a process with no credible comparison produces no information.

Then again after the buyer’s investigation, because a number you cannot explain is a number you cannot defend. When their accountants come back with adjustments, an owner who built their price from one source, or from what a competitor claimed, has nothing to push back with. An owner who can name the comparable transactions, the earnings definition, and why their company sits where it sits in the range is in a completely different conversation.

The part that is not in the spreadsheet

The fundamentals have to work. If a lender is involved, cash flow has to cover the debt, and no amount of enthusiasm fixes a company that does not.

Within those limits, large purchase decisions are made by people. Companies are rarely bought purely on the numbers; they are bought because of fit, because the buyer could see what the combination would do, because the thing solved a problem the buyer had been thinking about for two years. Which is why two buyers looking at the same company want different things from it, and why the same set of facts should be presented differently to each.

One is buying your customer list. One is buying your production capacity. One is buying the fact that you are three states away from anywhere they currently operate. A seller who presents the same case to all three is being heard correctly by at most one of them.

What getting it wrong costs

The valuation is not a formality you complete before the real work. It is the thing every later argument refers back to.

Every negotiation after it, the structure, the response to a diligence finding, the decision about which of two offers is actually better, resolves into whether you can say where your number came from. The quality of that answer decides whether those conversations are negotiations or concessions.

More on this: Why Two Companies With the Same Earnings Sell for Different Money.

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This is what we do. Prism Edge builds the valuation off current transaction evidence, with each comparable traceable to a named source and a stated earnings definition, and with asset and stock sale prices kept apart. You get a number you can explain in a room, which is the only kind that survives the buyer’s accountants.

The full chapter on what a buyer will pay, including every source and what each one is not, is in The Business Sale, free to download here.