The Goal of Lens 2

Lens 2 is here to level the playing field. It’s time to quit guessing what your company is worth in the market.

I want you — the owner-operator — to learn how the market thinks about value without being pressured to sell.

So you can:

This is what the Market Valuation Lens is for.

It gives you an objective way to estimate what your company would likely be worth in the open market, assuming no special premiums, no emotional attachment, and no unicorn strategic buyers.

Just the facts and fundamentals.

Like a water bottle might sell for $3 in the city or $3,000 in the desert, it’s still made up of the same core components:

Your business is the same.

No matter who owns it, it comes with certain fundamentals:

That’s the baseline—the par value.

Even if you never sell, knowing that baseline — and understanding what drives it — gives you one of the most powerful forms of strategic leverage an owner can have.

To communicate the market value of a business, we need a shared language — one that helps both sellers and buyers assess value based on real data, not gut feel or wishful thinking.

That language is built on four key metrics.
These are the same KPIs used in nearly every professional transaction in the middle market — whether you’re talking to a private equity firm, a commercial banker, an ESOP advisor, or a strategic buyer:

Together, they form the core formula for value:

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

This equation is the market standard for determining a company’s intrinsic value in a clean, arm’s-length transaction, regardless of who the buyer is.
It’s the best estimate of what your business is worth today, based on its current performance and risk profile.

The first two KPIs give us enterprise value, but that’s only part of the picture.
It tells you what the business is worth… before you factor in the capital required to operate it or clean up the balance sheet.

The second two KPIs, Net Debt and Normalized Working Capital, provide full context.
They clarify what that enterprise value means to you and how much of it you actually get to keep.

The final pieces of the equation — taxes, deal fees, earnouts, working capital pegs — all come into play in Lens 3: Strategic Transaction Value.
That’s when you’re evaluating one specific buyer, one deal structure, and one scenario.

Here in Lens 2, we’re staying focused on what the business is worth in the open market — clean, normalized, and objective.

Why These Four KPIs Matter

Every middle market deal, regardless of structure or buyer, requires alignment on four things:

These aren't deal terms.
They're ownership levers. Whether you sell or not.

They give you the ability to:

I’ve seen owners spend hundreds of thousands, even millions, pursuing a deal, only to back out at the last second because they didn’t fully understand what their company was worth until the final offer hit the table.

Worse, I’ve seen deals go through just because the train had left the station, only for the owner to regret it later.

They miss the cash flow.
They miss the purpose.
They realize what they gave up was worth more than what they got.

That kind of pain doesn’t come from selling.
It comes from selling without clarity.

Once you understand the difference between:

…you stop guessing.
You start making decisions aligned with your actual goals.

You can decide:

In this article, we’ll break down the four KPIs that drive market valuations — and show you how to track them.
That way, you can stop guessing what your company is worth — not just to you, but to the outside market.

Let’s dive into each one.

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

In the Owner’s Utility Lens, value is measured using discounted cash flow (DCF) based on your ownership distributions, your actual take-home cash flow after working capital, taxes, debt payments, and your unique corporate structure. It’s your personal internal rate of return target, grounded in your goals and the risk you’re carrying.

In the open market, though, investors need a way to see and assess a company’s cash flow without all those personal variables.

They need a clean, objective way to compare your business to other investments, regardless of how you’ve structured it or what decisions you’ve made along the way.

That’s why the market uses Normalized EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — as the baseline metric.

Normalized EBITDA is the agreed-upon proxy for operating cash flow.
It gives buyers and sellers a shared language for comparing companies — and turns your business from a personal narrative into an investment-grade asset.

Net Income Is for Taxes. Normalized EBITDA Is for Investors.

Many owners still use net income as a measure of success. But let’s be honest, most of us do everything we can to minimize it for tax purposes.

It’s full of noise.
And it gives a distorted view of how the business is really performing.

Here’s why net income is unreliable as a measure of value:

If you focus only on net income, you’ll end up making short-term decisions — cutting costs, hoarding cash, underinvesting in your people or systems — all to increase your K-1. And yes, it might boost short-term take-home pay.

Optimizing for net income can destroy long-term value.

You can’t cut your way to value growth.
You have to invest your way there.

Buyers know this. If they see underinvestment, they’ll lower their offer or walk away entirely.

“Prove It”

The next logical question — from a banker, broker, wealth manager, estate attorney, or buyer (even yourself) — is:

“Prove it.”

Tell me the story of your business.
Then back it up with clean, normalized financials.

Every owner I’ve met can tell one hell of a story, where they’ve been, what they’ve overcome, and why the future looks bright. But stories only go so far.

Normalized EBITDA is how you prove the story of the business.

It removes the noise and clarifies:

It’s the foundation for meaningful conversations about cash flow, both historical performance and future potential.

How to Calculate Normalized EBITDA (and What Gets Adjusted)

Start with Net Income
→ Add back:

That gives you EBITDA. But you’re not done.

Next, normalize it:

Remove anything not core to future operations.
If an expense (or income spike) won’t exist in the future — and isn’t required to generate future cash flow — adjust it out.

Typical adjustments include:

Think of it like real estate:

If you own a 20-unit apartment building and replace the roof this year, no one assumes you’ll do it again next year. The same principle applies here. You’re stripping away anything that distorts a “normal” view of operations.

Normalized EBITDA lets you separate investments from noise.
You’re not penalized for spending — you’re rewarded for clarity.

You’re telling the market:
“Here’s what we did. Here’s what worked. Here’s what you can expect.”

Make It a Monthly Practice — and Track It in a Financial Model

Normalized EBITDA isn’t just a valuation term.
It should be part of how you run your business.

If it’s one of the four KPIs the market uses to determine value, how can you expect to understand your valuation if you’re not tracking it?

This is about becoming the kind of owner who knows how to measure and influence what matters.

You should review and update your normalized EBITDA every month.
Most accounting systems won’t track these adjustments natively, so build it into your three-statement financial model.

If you don’t have one, start simple:
Create a Google Sheet. Track your add-backs. Keep your footnotes.
You won’t regret it.

Over time, this becomes your living proof, your evidence trail for how you’ve operated, invested, and created value.

And if you ever receive an offer or need to defend your valuation in real time, you won’t be scrambling to remember what was a one-time expense from three years ago. You’ll have the documentation ready, and buyers will trust it more.

Every dollar you can defend gets you closer to your real equity value.

Take It One Step Further: Actual vs. Forecasted Normalized EBITDA

If you want to think like an investor, track:

Doing this shows the market and yourself that you know how to predict, execute, and course-correct.

This is exactly how private equity firms run their portfolio companies.
It’s how professional investors manage value creation.

And it’s how you should too.

The more clearly you can demonstrate that you’ve built a machine with growing, predictable, sustainable cash flow, the more your business will be valued based on its future potential, not just its historical performance.

When you shift your mindset from Net Income to Normalized EBITDA, you stop thinking like an operator.

You start thinking like an investor.

You stop optimizing for taxes.
You start optimizing for long-term equity value.

This is the foundation of market valuation.

Next, I’ll break down the Valuation Multiple — where it comes from, what it represents, how to track it, and what determines whether your company earns a 3× or a 7× valuation.

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

Once you’ve established your Normalized EBITDA — the clean, adjusted proxy for operating cash flow — the next question becomes:

How risky is that cash flow?

As you can see in the image below, two companies with the same amount cash flow have wildly different risk profiles. One looks like the perfect stock portfolio, and the other looks like an EKG.

That’s what the multiple is really solving for. The risk of the cash flow.

Just like EBITDA reflects expected performance, the multiple reflects perceived risk. It’s the market shorthand for how many years of future cash flow a buyer is willing to pay upfront, based on how sustainable, predictable, and transferable they believe it is.

Why the Market Multiple Exists (Even Though It’s Imperfect)

The Theory Behind the Market Multiple

In a perfect world, every investor would run a full Discounted Cash Flow (DCF) analysis. They’d project future cash flows, apply a Weighted Average Cost of Capital (WACC) as the discount rate, and calculate the present value of those cash flows. Clean. Logical. Finance 101.

In that world, valuation is a formula:

1 ÷ WACC = Valuation Multiple

So if a company’s risk profile suggests a WACC of 20%, the implied multiple is 5×.
If it’s riskier and commands a WACC of 28.5%, the multiple drops to 3.5×.

But that’s the theory.

And theory rarely survives first contact with the private markets.

The Reality of the Private Market

The truth is, DCF doesn’t work well in the real-world messiness of private business M&A. Here’s why:

1. There’s No Real Price Discovery

There’s no Bloomberg Terminal for private companies. No public comps. No standardized data. No daily ticker showing price movement.

There’s no perfect centralized database of:

Each investor is flying blind, making decisions based on a mix of half-baked data, anecdotal experience, and gut feel.

2. No One Shows Their Hand

Everyone is negotiating in their own best interest.

From the seller’s side:

From the buyer’s side:

The result?
A massive communication and valuation gap.

Sellers see potential. Buyers see risk.
It’s like negotiating the price of a water bottle in two different languages—without ever seeing the bottle.

Why the Market Multiple Persists

This is why the M&A world defaults to something simpler: The Market Multiple.

It’s imperfect. It’s imprecise. But it gives everyone a shared language.

The multiple is the market’s shorthand for the same risk/return logic that underlies a DCF. It distills years of buyer experience, deal comps, and private equity pattern recognition into a usable rule of thumb.

It’s not pulled out of thin air.

It’s just a simplified translation of a complex idea—allowing owners to track, estimate, and improve the value of their business without needing to build a discounted cash flow model or hire a banker.

It gives you a baseline. A starting point. A common frame of reference.

And from there, you can start making better decisions.

Why Tracking the Market Multiple Range is Important

For you, the owner, the multiple becomes a lens to assess:

It’s how you establish your par value — the equivalent of a $3 water bottle in the city, under normal conditions.

Whether your buyer is a PE firm, ESOP, MBO, or strategic, the starting point is the same.

Where the Market Multiple Ranges Comes From

The multiple is a market-based proxy for perceived risk in your future cash flow:

Just like a DCF stacks risk premiums based on asset class, industry, company size, and operational strength, the multiple reflects three core buckets of risk:

1. Industry Risk

Different industries trade at different norms:

These are messy, but they aren’t arbitrary. They come from:

Every source is asking the same thing: “How much future cash flow can this business produce — and at what risk?”

2. Size Premium

Larger businesses usually command higher multiples:

There are common valuation step-ups at $1M, $2M, $5M, and $10M in EBITDA. These act like Zillow pricing brackets — not always logical, but real.

That said, bigger doesn’t always mean safer.

JoAnn Fabrics filed for bankruptcy even though 97% of stores were profitable — their debt load crushed them when interest rates spiked.

3. Company-Specific Operational Risk

This is the wild card.
It’s opaque.
It’s subjective.
It’s the one factor you can fully control.

Two companies with the same normalized EBITDA can command very different multiples based on:

One company is a machine. The other is duct tape and chaos.

The market can tell the difference.

Why You Should Track Your Market Multiple

You can’t change your industry overnight.
You can’t double your size in a week.

But you can reduce operational risk.

The more sustainable, predictable, and transferable your cash flow becomes,
the higher your multiple will be.

Let’s say your market range is 4×–7×.
Where would you fall?

One of the best tools I’ve seen is Ken Sanginario’s Value Opportunity Profile.
It scores your business across eight functional areas — using the same lens buyers apply during diligence. It gives you a structured way to assess and improve what drives your multiple.

But even without a formal tool, here’s the point:

It’s a mindset.
You want to think and run your company like an investment.

If you’re going to reinvest in a project, system, or strategy, make sure it either:

If it does neither… what’s the point?

How to Track Your Market Multiple Range

Most multiples get tossed around at conferences, on podcasts, or by advisors with little context, and they can feel arbitrary. But as you’ve seen, every industry and business size typically trades within a known range.

Start by researching what that range is for your industry and stage.
You can talk to:

Once you have a range — say, 4× to 7× — you can start running your own scenario modeling.

Multiply that range by your Normalized EBITDA (which you should already be tracking)
Plug it into a spreadsheet
See where you fall — and how changes in cash flow or risk could move the needle

At the simplest level, this gives you visibility.

At the highest level, you can build a Value Gap tab into your three-statement financial model, showing the delta between where you are and where you could be if you derisked or grew.

Either way, this practice turns valuation into a dashboard, not a guessing game.

This is how you begin managing your company from the boardroom — not just chasing revenue or normalized EBITDA, but intentionally engineering the durability of your future cash flow.

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

Net Debt = Total Debt – Excess Cash

In the middle market, every transaction is structured cash-free and debt-free.

That means you keep your cash.
But you’re responsible for paying off your debt — including loans, lines of credit, and equipment financing — at closing.

Even if you’re not selling, understanding this structure matters.

Because your cash and debt position today affects how much would actually go into your bank account if you sold, and therefore, how close you are to your personal goals.

That’s why Net Debt isn’t just a passive metric or deal term. It’s a capital allocation lens — one you should be using every day.

Debt and Cash Are Strategic Levers

Let’s say you’re sitting on excess cash.
Or considering new debt.

Ask yourself:

Every answer to these questions impacts your equity value.

These aren’t emotional decisions; they’re capital allocation choices.

In theory (and ideally in practice), debt is cheaper than equity.

If you borrow at 9% to fund a project that increases normalized EBITDA
— and lowers perceived risk — your multiple could go up too.

That’s how value grows.
That’s why smart debt can be a strategic accelerator.

But here’s the catch:

If the debt doesn’t drive future cash flow…
Or if the return doesn’t materialize…
It becomes dead weight.

That’s what kills equity value:

Even if you never plan to sell, net debt keeps you honest about how your capital structure is helping or hurting your goals.

It’s a feedback loop that connects your financial strategy to your personal net worth timeline.

Don’t Confuse Net Debt with Book Value

Most owners have been trained to think in terms of book value:

Assets – Liabilities = Equity

That’s the GAAP definition. And it’s useful — for taxes, banks, and compliance.

But book value is not your market valuation.
It’s not based on future cash flow. And it doesn’t reflect what your business is really worth to the market.

From Snapshot to Strategy

Yes, you can see your cash and debt today by looking at your balance sheet.

But if you want to project where it’s going, and what impact it will have, you need a real financial model.

That means:

That’s how you create a scoreboard for capital allocation, not just a report for the bank.

Too often, owners see more cash than debt and think:

“Our equity looks solid. We’re in good shape.”

But that’s a balance sheet story, not a valuation story.

Here’s the difference:

The reason the market values businesses cash-free and debt-free is simple:

It strips away the noise.
And focuses on what a buyer (or investor) is actually purchasing:
The cash flow engine.

They’re not buying your balance sheet.
They’re buying your business’s ability to generate future cash flow under their capital structure.

Just like when you sell a house, the buyer doesn’t care about your mortgage.
They care about the value of the house itself.

So even if your GAAP equity looks strong, your market equity could be weak, depending on how your cash, debt, and working capital are actually performing.

Let’s Ground It Again in the Market Valuation Formula

Normalized EBITDA × Market Multiple = Enterprise Value  

– Net Debt (Total Debt – Excess Cash)  

– Normalized Working Capital  

= Equity Value (Market Perspective)

This is not an accounting value.
It’s a cash flow–based market valuation, forward-looking, performance-driven, and independent of your personal capital structure.

Even if you’re not selling, this view gives you clarity on what you’re really building.

Net Debt Is a Capital Allocation Tool

Monitoring Net Debt isn’t just a way to judge value.
It’s a decision-making lens for how you use time, money, and risk.

It helps you weigh:

It’s not about “debt is bad” or “cash is king.”

It’s about using clean, objective KPIs to guide tradeoffs.

Without that lens, decisions become emotional.
You end up reacting to your checking account balance, not leading from the boardroom.

Net Debt turns gut instinct into investor-grade clarity.
It lets you run your business like the asset it is — and build equity value with intention.

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

Just like you can’t sell a car without the engine (at least not for full market value), you can’t sell a business without leaving behind the working capital required to fund its day-to-day operations.

Working capital is the engine that keeps the company running.

And whether or not you’re selling, understanding how much cash is required — and how efficiently you’re using it — is critical.

Working Capital = AR + Inventory – AP

This is operational capital, not actual cash.
It’s money tied up — stuck inside your business.

Back to the bottle of water example:

Working capital is the container that holds your cash flow.
You can’t hand someone the water if you don’t give them the bottle.

And you can’t run or sell a business if there’s no working capital in the system to keep it moving.

Working Capital: The Three Levers of Cash Flow Outside the P&L

This is about operational discipline.

And more importantly, it’s about understanding:

The three core drivers:

I’ve seen owners reduce DSO (days sales outstanding) from 60 to 30 days and unlock millions in real cash, without touching the income statement.

Optimize inventory turns and vendor terms?
You increase breathing room, without increasing revenue.

This is how world-class owners master cash:
They manage the levers outside the P&L.

Why Buyers (and Smart Owners) Care

Working capital is a non-negotiable for any functioning business.

A buyer can’t run the company without it.
You can’t either.

That’s why, in a transaction, a normal level of working capital must stay in the business and is deducted from the equity value at closing.

But even more importantly:

Normalized working capital is a signal.
It demonstrates your operational discipline, financial acumen, and capital allocation skill.
It tells the market — and yourself — how efficiently you're running the machine.

Track It as a % of Revenue, Not Just Dollar Amounts

Most owners get stuck thinking in raw numbers:

But here’s the issue:

As your business grows, those dollar figures grow too.
That’s not a problem… unless they’re growing faster than they should.

That’s why context matters.
The right question isn’t “How much is our AR?”

It’s: How efficiently are we using our cash, relative to revenue?

Normalized Working Capital as a % of Revenue

This metric gives you:

And maybe most important of all:

It gives you proof that your excess cash is actually excess.

If you’ve been letting cash accumulate on the balance sheet to feel safe, but can’t prove you don’t need it…

A buyer will assume it stays in the business.

I’ve seen that one mistake cost owners millions at closing.

From Operational Gut Feel to Ownership Strategy

I’ve coached dozens of owners who run their business by gut.

But that’s not a strategy. That’s a guessing game.

The real shift happens when you:

That’s how you build a true cash engine — not just a profitable business.

Working Capital Is Not Just an Operational KPI. It’s a Strategic Lens.

Normalized working capital tells you:

Used well, it becomes a core part of your internal scoreboard — a lens that connects operations to value creation.

It’s how you prove to yourself, a buyer, or a banker.
That your cash engine is tight, tested, and efficient.

Let’s bring this all to life with a real-world comparison. This is where the theory becomes a scoreboard.

In the chart below, we compare two fictional companies: Rockin Times and Advanced Solutions. Both have $10 million in revenue and $1 million in normalized EBITDA. But their equity valuations couldn’t be more different.

Why?

Because of the four levers we’ve just covered:

Let’s break it down:

Why the difference?

Rockin Times runs a more stable, predictable, and transferable operation. Its systems are tighter, its margins more reliable, and the owner’s role less central to the day-to-day. It’s a lower-risk machine — and the market rewards that with a higher multiple.

Now let’s apply those multiples:

But we’re not done yet.

To get to equity value, we have to subtract net debt and normalized working capital:

So the equity values look like this:

Same revenue. Same normalized EBITDA. But a $3.5 million gap in equity value.

That’s the power of these four levers.

What This Shows You

Owners often obsess over growing top-line revenue or squeezing out extra profit. But this example proves that how you run your business — not just how big it is — determines what it’s worth.

You can move the needle by:

Those four levers are how professional investors think — and it’s how you should, too.

You don’t need to chase growth at all costs. You just need to increase the quality and predictability of your cash flow.

That’s what creates real equity value.

Up Next: Lens 3
With all four KPIs in view, you’re no longer guessing what your business is worth. You’re managing it like an investor.

And when (or if) the time comes to explore a deal, you’ll enter the conversation with clarity, not just about what the business is worth, but what it’s worth to you.

In the next lens, we’ll explore what happens when a real buyer enters the picture — and how the actual transaction structure can change everything.