The #1 Mistake Founders Make When Valuing Their Business

Welcome back to the Mid Market Insider!

Today, we’re diving into the #1 mistake founders make when valuing their business and why smart founders don’t fall in love with their EBITDA.

EBITDA is a widely used metric in business valuation.

Why?

Because it allows for apples-to-apples comparisons between companies, regardless of their capital structure or tax situation.

However, it's important not to mistake EBITDA for cash flow.

The reality is that EBITDA leaves out several crucial factors.

Most notably, capital expenditures (capex), non-operating expenses, and changes in working capital.

Those factors directly affect how much cash a business actually generates.

If you focus solely on the headline EBITDA number, you risk overestimating what your business is truly worth to a buyer.

Digging deeper into your financials is essential to get a clear picture of true cash flow.

As Charlie Munger famously points out, depreciation isn’t really “non-cash” if you have to keep replacing equipment to stay in business.

In other words, a business that ignores the need for ongoing reinvestment is setting itself up for disappointment during a sale.

Use EBITDA as a starting point.

It’s a helpful tool for comparing companies of different sizes and industries on a level playing field.

But always adjust for your business’s real-world needs and realities.

If your company has high capex requirements, those must be factored in to avoid inflating your valuation.

Buyers are sophisticated and will dig into these details, so transparency is key.

It’s also worth noting that buyers may use EBITDA to calculate valuation multiples, but they’ll ultimately care most about the cash that’s left over after all expenses.

That’s why it’s so important to present a clear, honest picture of your business’s actual cash generation.

If you can show that your company produces steady, predictable free cash flow, even after accounting for capex and other real-world costs, you’ll be in a much stronger negotiating position.

In the end, EBITDA is just the beginning of the conversation, not the final word on value.

That’s all for today’s newsletter! Thanks for reading!

📅 Next Week:

In next week’s edition, I’ll be sharing the process of how anyone can buy a business with little to no money down. If you’re a 9-5er looking to escape and do your own thing, this one’s for you.

Keep building,
Nick

P.S. 

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