The multiple is the buyer's verdict, not yours

What is your business actually worth?

Not the number a mate quoted over a beer, or the one a broker floated to win the listing. The number a buyer would actually transfer into your account.

Most owners have an answer ready. It usually comes from somebody else's sale — a friend who got five times earnings, a competitor in the paper. That number was real. It just was not about you.

Almost every owner I meet is carrying one of those numbers around.

Worth is earnings times a verdict

The formula is short. Maintainable earnings, multiplied by a multiple. Most of the confusion comes from not knowing which half is being argued about.

Maintainable earnings is what the business reliably makes in a normal year, once the genuine one-offs are taken out. Owners spend their energy here. They argue for the add-backs they believe in, and they want the good year treated as the normal one.

Buyers spend their energy on the multiple. The multiple is their verdict on risk — how certain they are that those earnings keep arriving once you have left. You argue the earnings. They price the risk.

That is why the barbecue number is useless. It is somebody else's multiple on somebody else's risk.

Four things move the multiple more than most owners expect:

• Recurring revenue. Contracts, subscriptions, customers who reorder without being chased. Revenue that has to be won again every month is priced as if it might not be.
• Customer concentration. If one customer is a large share of sales, the buyer is buying that customer's mood as well as your business.
• Dependence on the owner. Every relationship, approval and quote that runs through you is risk that leaves on settlement day.
• Clean records. Accounts that reconcile, contracts in the company's name, numbers that match the tax returns. Anything a buyer has to take on trust gets priced as doubt.

Now the honest part. Market conditions move multiples too — interest rates, how many buyers are active, what the sector is doing that year. Nobody controls that, and nobody can tell you what next year's market will pay.

What you can control is how much risk a buyer finds when they look. The earnings are your case. The multiple is their answer to it.

WeWork lost most of its value in six weeks

In January 2019, WeWork took new money from SoftBank at a private valuation of $47 billion. It was one of the most talked-about private companies in the world.

On 14 August 2019 it filed its IPO prospectus, the S-1. For the first time, public investors could read the numbers in full: a 2018 net loss of about $1.9 billion on roughly $1.8 billion of revenue, and a structure that left enormous control with its founder, Adam Neumann.

The reaction was quick. By early September, Reuters was reporting that the company might seek a valuation of $10 billion to $12 billion. Neumann stepped down as chief executive later that month, and on 30 September the company withdrew its filing. In October, SoftBank took control in a rescue that valued WeWork at roughly $8 billion.

Most people tell that as a story about hype. Read it that way and you miss the useful part.

The business in October was the same business it had been in August. Same buildings, same members, same leases. The earnings did not change that month. The multiple did — because for the first time the people being asked to buy could see the risk they would be carrying.

A private valuation is an opinion formed with the risk partly out of view. A buyer's price is formed with it in plain sight.

Why I look at worth this way

I look at every business this way, and I have for years.

Eighteen years. Five businesses built and sold. From the seller's side of the table, the earnings are rarely where the time goes. The time goes into the buyer's questions about risk, because that is where the price is set.

So I stopped defending the number and started removing the reasons to discount it. Recurring revenue where the business allows it. No customer large enough to hold the price hostage. Decisions made without me in the room. Records a stranger could follow.

None of that fixes a price. Markets decide what they decide. It does mean that when a buyer looks, there is less for them to be uncertain about.

This is general information, not a valuation. A number you can rely on comes from someone who has read your actual accounts.

Do this before Thursday

Take last year's profit and write down every add-back you would argue for. Next to each one, write the evidence a stranger could check — an invoice, a contract, a bank statement. Cross out any that has none.

Then write one line for each of the four risks: what share of revenue recurs, what share your largest customer holds, which decisions only you make, and which records would not survive a stranger's questions.

By Thursday, circle the weakest of the four. That is the part of the multiple you can start moving.