If you are a business owner or adviser, it is important to understand how businesses are valued in the marketplace.

1. 2020
EDITION
BUSINESS
MARKET
VALUE
F O R O W N E R S & A D V I S E R S
O F P R I V A T E L Y - H E L D
C O M P A N I E S
ROBERT MALT
Guide to Understanding

2. AUTHOR NOTE
If you are a business owner or adviser, and
you want to know how businesses are valued
in the real world, then this guide is for you.
My name is Robert Malt, and I've been
valuing businesses since 2002. Sadly, the
level of confusion about business value is as
high today as it was back then.
As a result of this confusion, business owners
often end up spending a lot of money for
business appraisals that are worthless. It's
not only frustrating, but can be very costly.
Undervaluing a business can cause an owner
to sell for far too little, leaving money on the
table. Overvaluing can cause an owner to
reject a good offer, delaying retirement.
Quality retirement and exit planning can't
happen without an accurate appraisal.
So, I wrote this guide to help business
owners and advisers understand market
value in a simple and straightforward
manner. It is my sincere hope that you find
this guide valuable and helpful in making
business & personal planning decisions.
Sincerely,
Robert Malt
02©2020 ROBERT MALT

3. DISCLAIMER
The information provided in this
publication is for informational
purposes only and does not constitute
legal, accounting, financial, tax,
retirement, transaction, or investment
advice. Always consult your
professional advisers before engaging
in any planning or transaction.
Any use of the information provided in
this publication should not be
construed as a recommendation to
buy, sell, or hold any business
enterprise or investment.
The author does not make any
guarantee or promise as to any results
that may be obtained from using the
content of this publication.
To the maximum extent permitted by
law, the author disclaims any and all
liability in the event any information
contained in this publication proves to
be inaccurate, incomplete, unreliable,
or results in any losses of any kind.
03©2020 ROBERT MALT

4. 05 MEASURING VALUE
06 DEFINING MARKET VALUE
04©2020 ROBERT MALT
TABLE OF CONTENTS
07 THE PRIVATE COMPANY MARKET
08 PROFIT-DRIVEN
09 PROFIT MEASURE
10 DISCRETIONARY EARNINGS
11 DISCRETIONARY EARNINGS EXAMPLE
12 ADJUSTED EBITDA
13 ADJUSTED EBITDA EXAMPLE
14 PROFIT MULTIPLE
15 PROFIT MULTIPLE DATA & USAGE
16 BEYOND THE PROFIT MULTIPLE
17 GROWTH TREND
18 EXTRAORDINARY ITEMS
19 SUMMARY
20 ABOUT THE AUTHOR

5. MEASURING VALUE
Market Value
Fair Market Value
To begin, it is important to understand
there are two primary ways to measure
business value (the Standard of Value).
Market value is the measure of value
for market purposes (sale/purchase of a
business). Market value is governed by
market forces as determined by buyers
& sellers operating freely in the market.
Fair market value is the measure of
value for tax or legal compliance (gift &
estate taxes, divorce, lawsuit, etc.). Fair
market value is governed by Internal
Revenue Service and Tax Court rules.
These rules permit valuation analysts to
ignore market forces, and produce
results that have little resemblance to
market value.
In my experience, I have found that
95% of Business Appraisals using the
Fair Market Value Standard do not
reflect actual Market Value.
This guide only covers Market Value.
05©2020 ROBERT MALT

6. DEFINING MARKET
VALUE
As discussed on the prior page, Market
Value is a specific Standard of Value.
For privately-held businesses, I define
Market Value as follows:
Market Value is the estimated price,
terms and conditions at which an
appropriately marketed privately-
held business would sell to a
hypothetical, non-strategic buyer
under arms-length, non-distress, and
other circumstances where buyer
and seller are on equal footing.
This definition is necessarily long
because it addresses the main
components and conditions that affect
market value. For example, a seller can
get a better (higher) price if they give
the buyer better terms (such as a lower
down payment). Another example is a
distress sale, where the seller is under
pressure to sell quickly. This situation
would not be considered an example
of market value.
06©2020 ROBERT MALT

7. THE PRIVATE
COMPANY MARKET
Individual
Institutional
To understand how private businesses
are valued, it helps to understand who
buys them and why.
Private companies are not listed on a
stock exchange. They can't be sold
quickly, but there is a market for
privately-held businesses. In this
market there are two types of buyers.
Individual buyers are people looking to
buy a business they can run themselves
as owner/operators and make a good
living. These are small businesses with
annual revenue up to $5 million.
Institutional buyers are firms who raise
money from investors to buy multiple
businesses in order to make a profit for
themselves and their investors. These
are lower-middle market businesses
with annual revenue from $5 million to
$50 million.
07©2020 ROBERT MALT

8. PROFIT-DRIVEN
Buyers of both small businesses and
lower middle market businesses are
focused on making a profit.
Profits allow individual buyers to make
a good living.
Profits allow institutional buyers to
make a good return on investment.
Revenue doesn't pay bills (or investors).
08©2020 ROBERT MALT
PROFIT
DRIVES
VALUE

9. PROFIT MEASURE
Individual buyers and institutional
buyers measure profit similarly, but
with one key difference.
Individual buyers include the owner's
compensation & benefits as profit,
while institutional buyers don't.
Individuals include it because they will
be running the business themselves,
while institutional buyers must pay a
manager to run the business for them.
The profit measure used by individuals
is called Discretionary Earnings, while
institutions use Adjusted Earnings
Before Interest, Taxes, Depreciation,
and Amortization (a.k.a. Adj. EBITDA).
09©2020 ROBERT MALT
* In certain asset-intensive industries Adjusted EBIT is used instead.
Buyer (Size) Profit Measure
Individual
(Small Business)
Discretionary
Earnings
Institutional
(Lower Mid-Mkt)
Adjusted
EBITDA*

10. DISCRETIONARY
EARNINGS
Discretionary Earnings represents the
normalized profit for an individual
owner/operator. And profit is what
buyers want most. So, when small
businesses are listed for sale, the
Discretionary Earnings figure is
provided to prospective buyers. Buyers
typically use Discretionary Earnings as
the key metric to value (and purchase)
small businesses.
Discretionary Earnings is not found on
standard business financial statements
or tax returns. It must be calculated
using an income statement or tax
return, as well as, additional input from
the business owner. Business brokers
routinely prepare a Discretionary
Earnings schedule, also called a
"recast" or "normalized financials".
Discretionary Earnings (DE) is the
normalized Earnings Before Interest,
Taxes, Depreciation, Amortization, and
Owner Compensation & Benefits for
one owner/operator.
DE = Adj. EBITDAOCB
10©2020 ROBERT MALT

11. DISCRETIONARY
EARNINGS EXAMPLE
Below is an example of a Discretionary
Earnings schedule (bottom up method).
11©2020 ROBERT MALT
Revenue
Earnings before Tax
+ Interest
+ Depreciation
+ Amortization
+ Owner Salary
+ Benefit: Health Ins.
+ Benefit: Auto Expense
+ Benefit: Other
+ Non-Recurring Expense
= Discretionary Earnings
$1,000,000
$10,000
5,000
25,000
0
75,000
36,000
10,000
9,000
30,000
$200,000
Looking at the bottom line of a tax
return or income statement can be very
misleading, Only when Discretionary
Earnings is calculated, is the true
profitability of a small business
revealed.
Acme Services

12. ADJUSTED EBITDA
For lower middle market businesses,
the focus is on Adjusted EBITDA.
EBITDA is an acronym for Earnings
Before Interest, Taxes, Depreciation,
and Amortization. It is similar to
Discretionary Earnings except owner
compensation and benefits are not
added back (but they are normalized).
When lower middle market businesses
are marketed for sale, Adjusted EBITDA
is calculated and then included in a
marketing package (a.k.a. Information
Memorandum) given to prospective
buyers. Buyers typically use Adjusted
EBITDA* as the key metric to evaluate
and purchase middle market
businesses. It is the most closely
watched and reported on metric in the
private equity industry.
Adjusted EBITDA is defined as the
normalized Earnings Before Interest,
Taxes, Depreciation & Amortization.
12©2020 ROBERT MALT
* In certain asset-intensive industries Adjusted EBIT is used instead.

13. ADJUSTED EBITDA
EXAMPLE
Below is an example of a calculation of
Adjusted EBITDA (bottom up method).
13©2020 ROBERT MALT
Revenue
Earnings before Tax
+ Interest
+ Depreciation
+ Amortization
+/- Normalize CEO Salary
+/- Normalize Benefit
+ Non-Recurring Expense
+/- Rent Adjustment
+ Related-Party Expenses
= Adjusted EBITDA
$10,000,000
$225,000
25,000
150,000
0
+ 300,000
0
50,000
+ 200,000
50,000
$1,000,000
Adjusted EBITDA presents a more
accurate picture of the company's true
financial performance.
Gamma Enterprises

14. PROFIT MULTIPLE
Small businesses & lower middle
market businesses are bought and sold
primarily based upon a multiple of
their profit (i.e. Discretionary Earnings
or Adjusted EBITDA).
To determine a profit multiple paid for
a business, divide the transaction price
by the profit. See examples below:
Example #1: Acme Services
Annual Revenue: $1,000,000
Discretionary Earnings: $200,000
Transaction Price: $400,000
Profit Multiple: 2
($400,000 ÷ $200,000 = 2)
Example #2: Gamma Enterprises
Annual Revenue: $10,000,000
Adjusted EBITDA: $1,000,000
Transaction Price: $4,000,000
Profit Multiple: 4
($4,000,000 ÷ $1,000,000 = 4)
14©2020 ROBERT MALT

15. PROFIT MULTIPLE
DATA & USAGE
Many transactions are assisted by
business brokers. Some brokers report
their transaction data to firms that
make it available to subscribers. Similar
to how sales of comparable homes are
used in real estate appraisals, this data
makes it possible to estimate the value
of a business before it is sold.
Estimating a reliable Profit Multiple
requires finding data that is: (1) from a
reputable source, (2) of a similar size,
and (3) of the same or similar industry.
Two of the most reputable sources of
private company transaction data are
BizComps and DealStats.
The size of the business is important
because those with more revenue and
profit typically sell for higher multiples.
The industry is also important. Certain
industries command higher profit
multiples than others.
15©2020 ROBERT MALT

16. BEYOND THE
PROFIT MULTIPLE
The Growth Trend
Extraordinary Items
The Profit Multiple only gets you so far
in understanding business market
value. Two other factors substantially
affect market value. These are:
Transaction data reported by business
brokers only includes the most recent
fiscal year* of revenue and profit. This
makes it impossible to select
comparable transactions that match
the subject's growth trend.
Also, in the vast majority of cases, the
data does not include extraordinary
items that would substantially affect
the value of the business either
positively or negatively.
Consequently, to understand business
market value, one must realize that the
growth trend and extraordinary items
will have a large impact on market
value.
16©2020 ROBERT MALT
* In some cases, it will be reported as the trailing twelve months.

17. GROWTH TREND
Business brokers have long known that
revenue & profit growth greatly affect
the value (price, terms & conditions) of
a business. It's common sense. A
growing business seems less risky and
(potentially) more rewarding than one
in decline.
Consider the following example:
Profit for each company over 3 years:
2020 2019 2018
Alpha $250,000 $230,000 $210,000
Beta $250,000 $270,000 $290,000
Alpha is growing, while Beta is in
decline. All things being equal, Alpha
will sell for a higher profit multiple
than Beta. Yet since the 2019 & 2018
data is not reported, making a growth
comparison to a subject company is
not possible.
While the methods for solving this
problem are beyond the scope of this
guide, it is important to recognize that
growth does affect value.
17©2020 ROBERT MALT

18. EXTRAORDINARY
ITEMS
While all businesses have risk, some
businesses have extraordinary risks that
make the business less valuable. One
example is customer concentration. A
business that attributes 50% of its
profit to a single customer is perceived
by the buyer as more risky than a
similar business where no customer
accounts for more than 5% of profit.
There are other extraordinary risks, as
well as, extraordinary opportunities
that can have a substantial affect on
business market value.
While the details of extraordinary risks
and opportunities, and how to adjust
for them, are beyond the scope of this
guide, it is essential to realize that they
are a key factor in understanding
business market value.
18©2020 ROBERT MALT

19. SUMMARY
The most important elements in
understanding business market value
are as follows:
The market sets the rules.
Profit drives value.
The growth trend is important.
Look for extraordinary items.
I hope you have found this guide
enlightening and useful. For more
useful information for business owners
and advisers, please go to
maltandcompany.com.
Thank you.
Robert Malt, CM&AA
Founder | Malt & Company
19©2020 ROBERT MALT

20. ABOUT THE AUTHOR
Robert Malt has provided business
appraisal services since 2002,
completing over 400 appraisals.
Drawing upon his experience as a
business appraiser and business broker,
in 2012, he developed the Market
Modeling Method™ to more accurately
value small to mid-sized privately-held
businesses. This method replicates
private market behavior, producing a
consistent and reliable way to value
privately-held businesses.
Robert holds the Certified Merger &
Acquisition Advisor (CM&AA)
certification from the Alliance of
Merger & Acquisition Advisors. He has
an MBA from the University of
Maryland, and a BS degree from
Babson College. He lives in Asheville,
North Carolina with his wife & children.
Robert can be reached at 800-574-9211
or robert@maltandcompany.com.
20©2020 ROBERT MALT