You’ll hear a number at a trade show someday, standing around during the sessions with a fancy coffee in your hand, and someone will tell you what shops like yours are going for.
Sandee KaplanThey’ll say it as a slice of your sales, your “EBITDA” (what the heck even is that?), SDE, or some other arbitrary number or acronym as if every finishing shop in the country wore the same price tag.
Back in the spring, I published an article — “The Gap Between Sweat Equity and Enterprise Value” — and we talked about the disillusionment that can arise between how hard you work and what your shop is worth to someone else. Almost every email I got afterward circled back to the same question.
All right, Sandee, so how does anyone land on the number? That’s a fair question, so today let us sit with the number itself and how a buyer builds it. Once you see the machinery, you stop guessing about your own shop and start making deliberate decisions about how to change it.
What Owners Get Tripped Up the Most About
Start with what you’ve always heard, because it’s the one that trips up the most owners. Your shop doesn’t sell for a percentage of what runs through the top line. Gross sales tells a buyer how much activity moves through your building. It doesn’t tell them how much of that money you get to keep, and keeping is the whole point. A serious buyer values a shop like yours on a multiple of what the business truly earns. The phrase means what the shop truly earns, not what showed on last year's tax return after you spent 12 months making the number look small for the tax man. And it’s a multiple, which means the buyer takes that yearly earning and pays you some number of years of it up front, priced on how confident they are that it keeps coming.
So the first real lever is that earnings number, and it's where owners leave money on the table without knowing it. A buyer doesn't stop at the profit on your tax return. They add back the things that were always really yours and never the true cost of running the shop. The salary you pay yourself comes back, because a new owner will set their own. So does the "company" SUV that somehow seats the whole family on weekends, the cell phones, the meals that were business on some days and family on the rest, and the conference that mysteriously landed on a beach. We all run a little personal life through the company. When I sold, the add-backs were the part I understood the least and the part I wish I'd understood first.
Don't let the word multiple stay abstract, because the spread hiding inside it is where the real money lives. On the very same earning number, the difference between a buyer paying you two years of it and a buyer paying you twice that isn't a rounding error.
Here's the part that'll make you sit up. Every dollar you shave off your reported earnings to dodge a few cents of tax today comes back to cost you two or three of those same dollars the day you sell, because a buyer pays a multiple of your earnings. Hide a dollar to save thirty cents now, and you whack the whole multiple stacked on top of it later. So do the deeply unsexy thing that actually pays. Instead of burying the fun stuff as a fuzzy "business expense," bump your own W2 or your owner draws to cover it and let it sit on the books as exactly what it is. Yes, you'll hand the tax man a little more this year. You'll also get it back several times over at the sale, and you'll never break a sweat when a broker, a buyer's attorney, or an auditor goes through your numbers line by line looking for the skeleton you didn't leave in there. I'm not a lawyer, a tax accountant, or a financial advisor, so go bug yours. But this is one bit of cleanup you can start tomorrow morning, and the version of you who sells will want to buy this version of you a very nice dinner. A real one, off the company card (of course.).
Clean Books are Worth Real Money
This brings me to the least glamorous sentence I'll write all year: Clean books are worth real money. Not tidy for its own sake, and not tidy to please your accountant. Tidy because you can't add back what you can't document. If the vehicles, the phone, your real pay, and all the other stuff we all run through our businesses aren't on paper in a way a stranger can follow in an afternoon, then, as far as your buyer is concerned, they never existed. And here's the part that stings once you see it- every dollar you can't prove doesn't come off your price one time. It comes off as multiplied because it was supposed to live within the earnings number the whole multiple sits on top of. One documented dollar is worth the multiple. One undocumented dollar is worth nothing, and it drags the multiple down. The shoebox of receipts in your desk drawer isn't a bookkeeping problem. It's a valuation problem wearing a bookkeeping costume.
Now, the multiple itself: two shops with the same earnings number won't sell for the same price, and the reason is worth unpacking. A buyer pays a higher multiple for earnings they believe will still be there in three years without them holding their breath. Repeat customers raise it. Real contracts raise it. A wide base of work that doesn't lean on any single relationship raises it. Anything that makes next year look like a safe bet lifts the number of years a buyer will pay for up front, and anything that makes next year look like a coin flip pulls it back down.
Don't let the word multiple stay abstract, because the spread hiding inside it is where the real money lives. On the very same earning number, the difference between a buyer paying you two years of it and a buyer paying you twice that isn't a rounding error. It's the difference between the retirement you pictured and the one you talk yourself into settling for. That spread isn't luck, and it's not the size of your building. It's built one trustworthy quarter at a time, out of exactly the things we're talking about here.
Carry this with you: the number isn't a verdict on how hard you’ve worked or how much you cared. It's a scoreboard, and the real gift buried in everything I just described is that every piece of that scoreboard is something you can move, starting this quarter, with no buyer anywhere in sight.
That's where customer concentration comes in. I covered this extensively last month in an article called “Growth For Everybody’s Sake” if you’d like to go back and review the expounded thoughts on diversification. You might have an account that's 40% of your revenue, and from inside the shop, that feels like your finest achievement. To a buyer, it reads as your largest risk. They're not admiring the relationship. They're sitting in their office running the version of the month where that customer leaves, because from where they sit, the day you turn over the keys is exactly the kind of day a big customer starts taking calls from your competitors. A shop with a hundred steady accounts and no single one too large will sell for more than a shop the same size that leans on one or two, even when the leaning shop is making more money this year. Diversification is safety, and the multiple pays for safety every time. If you do one thing with this article, look hard at your top account as a share of the whole, and understand that shrinking that share by growing everyone around it is one of the most valuable moves you can make, even if your total revenue never moves an inch.
Buyer Pays for Earnings They Trust
The parts of my shop I assumed were the value turned out not to be. It wasn't the state-of-the-art zirconium pretreatment line, our big oven, the newer line, the building itself, or the months of backlog I used to point at as if it were a trophy. None of it was worthless, and none of it was the point. A buyer can find equipment on any given Tuesday. A building is a building. And backlog isn't the same thing as demand that repeats, because a pile of work you already booked runs out, while a base of customers who keep coming back doesn't. What a buyer is paying for is earnings they trust will still be there after you're gone. The steel is just the room where those earnings happen. Own your equipment because it does good work, not because you believe it's the thing you'll one day sell. In the end, most of it is barely worth scrap metal prices, and the cost to take it out of the building exceeds the equipment's value.
One thing that determines the number, in a way most owners never stop to consider, is who's doing the buying, because the same shop is worth different money to different people. A competitor already working in your market may pay the most, because they can fold your work into a plant they already run and keep the overhead you were each paying separately. A financial buyer (M&A), the sort putting together a group of shops under one roof, is running colder math, and they'll hold you to every number on the page and every promise you make about next year. An employee, or a son or daughter buying you out, rarely has the cash to match what an outside buyer would put on the table, and that's its own hard conversation for a day down the road. None of this changes what your shop earns. It changes what a given buyer is willing to pay for those earnings, and it means the real question isn't only what your shop is worth, but what it's worth to the particular person sitting across the table from you. Knowing which kind of buyer that is will tell you a great deal about the number you're likely to hear, often before anyone says it.
For now, do one small thing for yourself. Pull your last three years of books out of whatever program they live in, and read them the way a stranger would- cold, with nothing in your memory to fill the gaps.
Carry this with you: the number isn't a verdict on how hard you’ve worked or how much you cared. It's a scoreboard, and the real gift buried in everything I just described is that every piece of that scoreboard is something you can move, starting this quarter, with no buyer anywhere in sight. Clean up the books, and the earnings number the whole multiple rests on gets bigger and easier to prove. Spread the customer base and the multiple itself climbs. Write down what lives only in your head, and the risk a buyer has to price for begins to shrink. None of that requires a sale. It requires deciding that the number is worth managing while the shop is still yours. That decision costs you nothing, and you can make it this afternoon, long before you ever decide whether you want to sell at all.
Pull Your Last Three Years of Books
This article is not the whole story. You can do every bit of this right. You can keep books a CPA would frame, spread your customers across a healthy base, and build earnings anyone would trust, and still watch a buyer cut your price in half in a single afternoon over something that has nothing to do with any of it. It waits in the ground under your building, in the permits that carry your name, and in whatever file the municipality has been keeping on your shop for the last twenty years. That's the environmental and due-diligence gauntlet, and it's the part of selling a shop that belongs to our world and almost no other. Next month, in a piece I'm calling "When Strangers Open Every Drawer," we'll walk into it together.
For now, do one small thing for yourself. Pull your last three years of books out of whatever program they live in, and read them the way a stranger would- cold, with nothing in your memory to fill the gaps. Ask yourself whether they show everything your shop truly earns, or only the part you could prove in a room full of people who don't know you. Sit with the difference. That difference, in dollars, and then multiplied, is a good share of what your shop is really worth. Start there, because the shop that reads clean to a stranger is the one that holds its price when the day comes.
More soon.
Sandee Kaplan is an Operations Leader and a former owner of a manufacturing and finishing business. Visit https://k2operations.com or email her at Sandee@K2Operations.com.
