What Is a Business Valuation? (And Why You Need One Before You Sell)

What Is a Business Valuation?

A business valuation is a process that determines the economic value of your company. It's basically answering the question: "What is my business worth if I tried to sell it today?"

I've been through this process five times with my own SaaS exits, and here's what most articles won't tell you: a valuation isn't some magical number that exists in a vacuum. It's what someone is willing to pay, under specific conditions, at a specific time.

When you get your business valued, you're looking at your revenue, profit margins, growth rate, customer retention, market position, and a dozen other factors to arrive at a number. That number can change dramatically based on who's buying and why they want your company.

I learned this the hard way early in my career. I once worked with a CEO who was running what looked like a $100 million startup, but when things fell apart, I discovered the entire company was built on a house of cards. I had closed over $1 million in deals in under 6 months, but the CEO wasn't delivering any work and eventually vanished - leaving me as the face of the brand with clients demanding refunds. That experience taught me that understanding a business's real valuation isn't just about numbers on paper; it's about verifying the fundamentals are actually there.

Why Do You Need a Business Valuation?

There are several reasons to get your business valued, and selling isn't always the primary one.

Preparing for a Sale or Exit

This is the obvious one. Before you list your business on Flippa or start talking to private equity firms, you need to know what you're worth. Not knowing your valuation means you're negotiating blind-and that's how you leave money on the table.

I've seen too many agency owners who built solid businesses accept lowball offers because they had no idea what their company was actually worth. Don't be that person.

Raising Capital or Securing Loans

If you're trying to raise money from investors or get a business loan, lenders want to see a formal valuation. They need to understand the equity they're buying or the collateral they're lending against.

Bringing On Partners or Selling Equity

When you bring on a partner or sell a portion of your business, you need to know what percentage of the company you're actually giving away. A proper valuation ensures everyone's on the same page about what each share is worth.

Strategic Planning and Growth

Even if you're not selling tomorrow, getting a valuation helps you understand which parts of your business drive value. Maybe your churn rate is killing your multiple, or maybe your recurring revenue model is worth more than you thought. Knowing this helps you focus on what actually matters.

I use this information constantly when working with agency owners inside my coaching program-understanding your valuation drivers changes how you run the business.

The Three Main Valuation Methods

There are three primary approaches professional valuators use. Depending on your business type and stage, one method might be more relevant than the others.

Asset-Based Valuation

This method adds up everything your business owns-equipment, inventory, real estate, intellectual property, cash-and subtracts what you owe. You end up with your net asset value.

This approach makes sense for asset-heavy businesses like manufacturing companies or real estate firms. For service businesses and SaaS companies like the ones I've built and sold, asset-based valuations typically undervalue the business because they ignore future earning potential.

Market-Based Valuation (Comparables)

This method looks at what similar businesses have sold for recently. If agencies in your niche are selling for 3x annual profit, that's your starting point.

The challenge here is finding truly comparable businesses. A marketing agency doing $2M in revenue with 40% margins and 90% client retention is worth more than one doing $2M with 20% margins and 60% retention-even though they look similar on paper.

Income-Based Valuation (DCF)

Discounted Cash Flow (DCF) analysis projects your future cash flows and discounts them back to present value. This is the most complex method but also the most accurate for businesses with predictable revenue streams.

For SaaS companies and agencies with recurring revenue, this is usually the preferred method. Buyers care about future cash flow more than current assets.

Watch my walkthrough in this video:

Common Valuation Multiples for Different Business Types

In the real world, most small to mid-size business valuations come down to multiples. Here's what I've seen across my exits and from working with hundreds of agency owners.

Service-Based Businesses and Agencies

Marketing agencies, consulting firms, and other service businesses typically sell for 2x to 4x annual net profit (EBITDA). Some factors that push you to the higher end:

• Recurring revenue or retainer clients
• Low client concentration (no single client represents more than 15% of revenue)
• Documented processes and systems
• A team that can run without you
• Consistent year-over-year growth

If your agency is just you and a few freelancers, expect the lower end or even below 2x. If you've built a machine that runs without you, you can command 4x or more.

SaaS and Software Companies

SaaS businesses typically sell for 3x to 10x annual recurring revenue (ARR), depending on growth rate, churn, and profit margins. High-growth SaaS with low churn can command even higher multiples.

My own SaaS exits have been all over this range. The key drivers were always the same: monthly recurring revenue, low churn rate, and whether the product could grow without me personally involved in every sale.

With ScraperCity, understanding these valuation metrics influenced every decision-from pricing strategy to customer retention focus to building products that deliver ongoing value.

E-commerce Businesses

E-commerce companies usually sell for 2x to 4x annual net profit, similar to agencies. The multiple depends heavily on whether you're selling proprietary products or arbitraging commodities, your supplier relationships, and your brand strength.

Local and Brick-and-Mortar Businesses

Traditional local businesses-restaurants, retail stores, service providers-often sell for 2x to 3x annual profit, sometimes less. Real estate can complicate this if you own the property.

What Actually Increases Your Business Value

After five exits, here's what I've learned actually moves the needle on valuation. This isn't theory-this is what buyers paid me more for.

Recurring Revenue

Nothing increases your multiple faster than predictable, recurring revenue. A business doing $500K annually with 80% recurring revenue is worth significantly more than one doing $800K with project-based revenue.

This is why I shifted every business I've built toward recurring models. Retainers, subscriptions, maintenance contracts-whatever makes sense for your business model.

Low Customer Concentration

If your top three clients represent 60% of your revenue, your business is risky and will be valued accordingly. Buyers want diversification. Aim for no single client representing more than 10-15% of revenue.

Documented Systems and Processes

Buyers don't want to buy your personal expertise-they want to buy a system that produces results. Every process should be documented, every role should have an SOP, and the business should be able to run without you for at least a month.

I cover this extensively in the 7-Figure Agency Blueprint, because systematization is what separates a sellable business from a glorified job.

Strong Unit Economics

Your customer acquisition cost (CAC), lifetime value (LTV), and profit margins tell the story of your business model's health. A 3:1 LTV to CAC ratio is decent; 5:1 or higher is exceptional and commands premium multiples.

Growth Trajectory

A business growing 30% year-over-year is worth more than a flat or declining one, even if the flat business is currently bigger. Buyers are buying future cash flows, and growth indicates those cash flows will increase.

Here's what I tell my clients about proving value: before you even think about valuation, get three paying customers. The first might be a fluke, the second could be luck, but the third proves you have a repeatable sales process. One agency I worked with went from referral-dependent to building a systematic outbound process - they could have gone from $20 million to $60 million in under 6 months just by sending a few dozen emails a week. That kind of scalable, predictable revenue system is what actually multiplies your valuation.

How to Actually Get Your Business Valued

There are several ways to get a valuation, depending on how serious you are and what you need it for.

DIY Valuation Calculators

Free online calculators can give you a ballpark number. You input your revenue, profit, industry, and growth rate, and they spit out a range. This is fine for curiosity or early planning, but don't make decisions based on these numbers.

Hire a Business Broker

Business brokers will provide a free valuation if you're considering listing with them. They're incentivized to get the number right because they only get paid when your business sells. The downside is they might inflate the number to win your listing.

Professional Business Valuator

A certified business valuator will charge $3K to $15K+ depending on your business complexity, but you'll get a formal, defensible valuation report. This is necessary for legal disputes, tax purposes, or serious acquisition discussions.

Investment Banker or M&A Advisor

For larger exits ($5M+), investment bankers can provide valuations as part of their sell-side advisory services. They understand buyer psychology and market conditions better than anyone.

Common Mistakes That Tank Your Valuation

I've made some of these mistakes myself, and I've watched dozens of agency owners make them too.

Mixing Personal and Business Expenses

When your business pays for your car, your family's health insurance, and your "business" trip to Bali, buyers discount your profit numbers because they don't know what's real. Keep clean books.

Being the Business

If you're the rainmaker, the fulfillment team, and the account manager, you're not selling a business-you're selling a job that requires the buyer to replace you. That's worth significantly less.

No Financial Documentation

Incomplete or inaccurate financial records kill deals. You need at least two years of clean financials, ideally three. Buyers won't pay top dollar when they can't trust the numbers.

Poor Client Relationships

High churn, payment issues, or clients who only work with you because of personal relationships all reduce value. Buyers want stable, happy customers who will stick around post-acquisition.

The biggest mistake I see founders make is relying purely on referrals and inbound before trying to sell. If you're dependent on referrals, you're leaving massive money on the table. When you have outbound working, every customer you close through outbound could deliver three or four more referrals. I once helped a client who worked with Sony - instead of waiting for Sony to refer them, we built an outbound system so they could proactively tell prospects about the Sony relationship. That's the difference between hoping for growth and controlling it.

When to Get Your Business Valued

Here's my honest advice: get a valuation every year, whether you're planning to sell or not.

Understanding your current value helps you make better decisions. Should you hire that expensive salesperson? Invest in that new product line? Those decisions become clearer when you understand how they impact your valuation.

I started doing annual valuations after my second exit, and it changed how I ran every subsequent business. You start optimizing for the right metrics instead of vanity numbers.

If you're actively planning an exit, get your valuation at least 12-18 months before you want to sell. That gives you time to fix what's broken and improve your multiple. I walk through this process with agency owners inside Galadon Gold because exit prep determines whether you get a life-changing number or just a decent payday.

I built my first sustainable agency to $600,000 in annual recurring revenue in just 60 days using cold email. I would send out 20 emails per day - from the first batch of 20, I booked 8 meetings. The key was having a system in place before trying to scale. If you're thinking about getting a valuation, first prove you can systematically acquire customers. Start at a lower price point to prove the model works, then scale up. We started at $1,000, then $2,000, then $4,000, eventually settling at $12,000 per client. That kind of proven, scalable system is what makes your business actually valuable to buyers.

The Bottom Line on Business Valuations

A business valuation isn't just a number-it's a diagnostic tool that shows you what's working, what's broken, and where to focus your energy.

Whether you're selling next month or building for the long term, understanding valuation fundamentals helps you build a more valuable, more sellable business. The metrics that drive valuations-recurring revenue, low churn, documented systems, strong margins-are the same metrics that make your business easier and more profitable to run.

If you're serious about building a sellable agency or SaaS business, grab the 7-Figure Agency Blueprint. It covers the systematization and growth strategies that directly impact your valuation multiple.

And if you want feedback on your specific situation-whether you're building for an exit or just trying to increase your business value-that's exactly what we work on together with real businesses in real time.