In the Owner’s Utility Lens, we looked at value through your eyes — how the business serves you in terms of time, cash flow, and wealth. That lens was personal. It was about what your company is worth in your life, given your goals, risks, and trade-offs.

The Market Valuation Lens strips all of that away. It shows you what a financially motivated buyer would likely pay for your business in today’s market. It’s the lens that investors, bankers, and buyers use because it gives them a common language to compare your company against thousands of other opportunities.

The Market Lens isn’t about your personal income or lifestyle. It’s about whether your cash flows are sustainable, predictable, and transferable — and what someone else is willing to risk capital on.

Think of the bottle of water analogy:

Your business works the same way. Different investors, different markets, and different conditions will see the same company in different ways.

That’s why the Market Lens matters even if you’re not selling:

At its core, the Market Lens runs on a simple but powerful formula:

Normalized EBITDA × Valuation Multiple – Net Debt – Normalized Working Capital = Equity Value

The Four KPIs of Market Value

Every buyer, banker, or investor — whether they’re private equity, a strategic buyer, or a lender — looks at the same four levers to determine value.

Together, these four levers give buyers the confidence to price your business.

This is the shared language of investors. If you understand these four KPIs, you understand how the market values your company.

Normalized EBITDA × Multiple = Enterprise Value 
– Net Debt 
– Normalized Working Capital 
= Equity Value 
– Taxes & Fees 
= Net Proceeds

The first lever in the market valuation formula is Normalized EBITDA.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. On its own, EBITDA is meant to strip out financing and accounting noise so investors can see the business’s earning power. But for private companies, raw EBITDA is rarely clean enough.

That’s why buyers use Normalized EBITDA — a cleaned-up, adjusted measure of operating cash flow. It removes one-time, owner-specific, or non-recurring items so buyers can see what the business consistently produces.

Put simply, normalized EBITDA is the proxy for sustainable cash flow. It’s the shared language that lets buyers compare businesses across industries and ownership structures.

Why Net Income Fails the Test

Most owners are conditioned to think in terms of net income. But net income is for the IRS — not for investors.

Net income is distorted by:

Optimizing for net income often means underinvesting in people, systems, and growth, all to boost your K-1— actions that ultimately destroy long-term equity value. Buyers know this. That’s why they dismiss net income as a valuation measure.

Normalized EBITDA is different. It’s about demonstrating the real earning power of the company going forward.

“Prove It” — Turning Story Into Numbers

Every owner I’ve met can tell one hell of a story — where you’ve been, what you’ve overcome, why the future looks bright. But stories only go so far; buyers will ask: “Prove it.”

Normalized EBITDA is how you prove your story. It tells investors what the company consistently earns after normalizing for noise, and it provides evidence for why they should trust your projections of future cash flow.

It removes the noise and clarifies:

That’s why I call EBITDA the story of your business. Every adjustment you make is part of that story — and it has to be defensible.

How to Calculate Normalized EBITDA (and What Gets Adjusted)

Start with Net Income
→ Add back:

That gives you EBITDA. Then, normalize it: 

Go line by line on your income statement and identify expenses (or revenue spikes) that distort what the business will look like going forward. Adjust them out to show a “normal” run rate of operations.

There are three kinds of adjustments:

Example:

In this example, each adjustment comes directly from a line on the income statement — either an expense that won’t recur, or a cost that’s artificially low today and must be trued up. The result is a clearer, more defendable picture of what the company consistently earns.

Think of it like real estate: if you replace the roof this year, no one assumes you’ll do it again next year. Buyers strip out that one-time cost so they can see the building’s “normal” operating cash flow.

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

Normalized EBITDA isn’t just a one-time valuation exercise. It should be part of how you manage the business. In fact, it should be one of your core KPIs, regardless of whether there’s a buyer at the table.

This becomes your evidence trail — living proof of how you’ve invested and created value. And if an offer shows up, you won’t be scrambling to remember a one-time expense from three years ago. Every dollar you can defend gets you closer to your real equity value.

Here’s the other benefit: when a buyer is at the table (in the Strategic Transaction Value Lens), the normalized EBITDA exercise becomes specific to that buyer’s assumptions and deal structure. By doing this work every month, you start on solid ground. You’re not reconstructing years of history or forgetting details — you already know what’s normal, what’s defensible, and what the true earning power of your business is.

This is exactly what private equity firms do with their portfolio companies. It’s how professional investors track value creation.

For you, it’s not about playing games. It’s about clarity. If you don’t measure it monthly, you can’t influence it. Track your add-backs, keep your footnotes, and build it into your financial model. Even a Google Sheet works.

Why It Matters

By separating tax-driven net income from investment-grade normalized EBITDA, you shift your mindset:

This is the foundation of market valuation. If you want to understand how the market sees your company, it starts here.

👉 Next, we’ll move to the Valuation Multiple — the market’s shorthand for risk, and the lever that often makes the biggest difference in what buyers are willing to pay.

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

How risky is that cash flow?

That’s what the multiple is really solving for. Just like EBITDA reflects expected performance, the multiple reflects perceived risk. It’s the 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.

Normalized EBITDA × Multiple = Enterprise Value
– Net Debt
– Normalized Working Capital
= Equity Value

The Theory: Multiple as the Inverse of Risk

In finance theory, multiples come directly from a Discounted Cash Flow (DCF) calculation (for more information, check out the Owner’s Utility Lens). An investor projects future cash flows, applies a discount rate to reflect risk, and calculates the present value of those cash flows.

In that model:

1 ÷ Discount Rate = Valuation Multiple

Lower risk = lower discount rate = higher multiple. Higher risk = higher discount rate = lower multiple.

This is why multiples exist — they’re a shorthand translation of risk into price.

The Reality: Private Markets Are Messy

But in the world of private business M&A, multiples don’t always line up neatly with DCF math.

Why?

This is why you’ll sometimes see a company trade at 5× even though the DCF math suggests 4×. Multiples rhyme with the math, but they’re shaped by comps and sentiment.

The Risk Pyramid

So what actually drives multiples up or down? Just like a DCF stacks risk premiums based on asset class, industry, company size, and operational strength, buyers translate risk into multiples through three main buckets:

One company is a machine. The other is duct tape and chaos. The market can tell the difference.

Tools like Ken Sanginario’s Value Opportunity Profile or an 8-driver “spider chart” score these factors the way buyers do in diligence.

Visual Analogies

To make this real, let’s use a couple of analogies.

Two Houses: Both are 2,000 square feet. One is freshly updated and turnkey. The other has a leaky roof and outdated wiring. Same square footage. Very different price. How does this relate to business? Walk-in ready is the same as sustainable, predictable, and transferable cash flow.  That’s the multiple. It’s how the market prices confidence in the cash flow.

Below, we present two companies and their past cash flow stability. Both companies can claim $2M in Normalized EBITDA; however, one company’s earnings resemble those of a steady stock portfolio. Another looks like an EKG chart — spikes and crashes: same EBITDA number, wildly different multiples. 

Company-specific risk is the main driver behind both of these companies, all things being equal. One company is a machine. The other is duct tape and chaos. 

One tool I’ve come across that helps assess the company-specific risk is Ken Sanginario’s Value Opportunity Profile. It scores your business across eight functional areas — using the same lens buyers apply during diligence. It provides a structured approach to assess and improve what drives your multiple. 

Below you can see an example of the eight areas and how each of the companies above runs their business.  

Value Driver Assessment: Below is a quick gut-check for you. You can rate yourself on each of the eight value drivers. For the full PDF, please download it here. Don’t forget to watch the video, where I walk you through the details of how to fill it out. 

Case Study: Rockin Times vs. Advanced Solutions

Let’s put numbers to it.

Two companies each have $2M in normalized EBITDA.

Same Normalized EBITDA. A $5.2M gap — driven entirely by how risky the cash flow looks to the market.

Why Multiples Matter to You

You can’t change your industry overnight. You can’t double your size next week. But you can reduce company-specific risk.

That’s why multiples matter for owners:

Managing your multiple isn’t about obsessing over a sale. It’s about running your business like an asset — one that produces sustainable, predictable, transferable cash flow.

Normalized EBITDA × Multiple = Enterprise Value  

– Net Debt  

– Normalized Working Capital  

= Equity Value  

– Taxes & Fees  

= Net Proceeds

Net Debt = Total Debt – Excess Cash

The Deal Reality: Cash-Free, Debt-Free

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

Owners often miss this. They think, “My business is worth $10M.” But if you’ve got $2M in debt, the check you actually take home is $8M.

That’s why understanding net debt isn’t just about selling. It tells you how much of your business’s value you’re really building today.

Good Debt vs. Bad Debt

Not all debt is created equal:

Good Debt (Flywheel)

Bad Debt (Dead Weight)

The distinction is simple: good debt increases value, bad debt erodes it.

Book Value vs. Market 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 equity ≠ market equity. 

Here’s the difference:

The reason the market values businesses as 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 (that is, unless you are liquidating your assets).
They’re buying your business’s ability to generate future cash flow under their capital structure.

From Snapshot to Strategy

Looking at your balance sheet tells you what cash and debt you have today. But projecting equity value requires a financial model that ties all three statements together.

That’s how you can:

Without this, you’re reacting to your checking account balance. With it, you’re allocating capital like an investor.

The Owner’s Takeaway

Net Debt is more than a deal adjustment. It’s a decision-making lens. It forces you to weigh:

The point isn’t “debt is bad” or “cash is king.” It’s about clarity—clean, objective KPIs that guide trade-offs.

Normalized EBITDA × Multiple = Enterprise Value

– Net Debt

– Normalized Working Capital

= Equity Value

Working capital is one of the most overlooked drivers of valuation. It’s the “container” that holds your cash flow. Buyers require a normal level of working capital to remain in the business at closing so that operations can keep running smoothly on Day 1.

What Working Capital Really Means

Working capital is the engine that keeps the company running. It’s not excess cash sitting in the bank — it’s money tied up in the operations of your business.

At its simplest, working capital is:

Working Capital = AR + Inventory – AP

Together, these three levers determine how much cash is trapped inside the business versus available to you as the owner.

Why Buyers Care (and Why You Should Too)

When a deal closes, a buyer doesn’t want to inject extra cash just to keep the lights on. They’ll set a working capital peg based on what’s “normal” for your industry and business.

Either way, working capital adjustments can swing millions of dollars.

Example: 15% vs. 20% of Revenue

Let’s say your company does $10M in revenue.

That’s real money. And it flows straight to your pocket or back into growth.

Track It as a KPI (% of Revenue, Not Dollars)

Most owners think in raw numbers:

The problem? As revenue grows, those numbers grow too. Without context, you can’t tell if your working capital is efficient or bloated.

That’s why you should always track normalized working capital as a % of revenue.

This single metric gives you:

Most importantly, it shows whether “excess cash” is actually excess. If you can’t prove you don’t need it, a buyer will assume it stays in the business. That mistake alone has cost owners millions at closing.

The Three Levers of Cash Flow Outside the Income Statement

Owners often think, “We’re profitable — where’s the cash?” The answer is usually in working capital. Here’s how each lever works:

Each adjustment makes your business more efficient, lowers perceived risk, and increases equity value.

This is about operational discipline, and more importantly, it’s about understanding:

This is how world-class owners master cash: They manage the levers outside the income statement.

From KPI to Strategic Lens

Normalized working capital tells you:

Used well, it becomes part of your internal scoreboard — a lens that connects operations to long-term value creation. It’s how you prove your cash engine is tight, tested, and efficient — to yourself, a buyer, or a banker.

The Owner’s Takeaway

Working capital isn’t an accounting term — it’s a strategic lever.

Manage it proactively, and you stop reacting to a bank balance. You start leading like an investor.

The Market Valuation Lens strips away emotion and tells you how the market sees your company today — through the same formula every professional buyer uses:

Normalized EBITDA × Market Multiple = Enterprise Value
– Net Debt (Total Debt – Excess Cash)
– Normalized Working Capital
= Equity Value

These four levers are the baseline of every valuation conversation:

Why This Lens Matters

Most owners anchor to fantasy numbers — revenue multiples, net income, or hearsay from an industry peer. But buyers, bankers, and investors all use this same four-part formula.

Example Recap

Think back to Rockin Times and Advanced Solutions. Both had $2M in normalized EBITDA.

Same EBITDA. A $5.2M difference. That’s the power of the four levers.

Let’s break it down:

Why the difference?

Rockin Times runs a more stable, predictable, and transferable operation. Its systems are tighter, its margins are more reliable, and the owner’s role is less central to the day-to-day operations. 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 $6.2 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.

The Owner’s Perspective

You don’t have to wait for a buyer to show up to measure these levers. You can — and should — track them now.

Together, these give you a scoreboard of how the market values your company — today.

Up Next: Lens #3: Strategic Transaction Value

The Market Valuation Lens gives you the baseline math. It shows how a financially motivated buyer would value your company under normal conditions.

But no deal ever closes “at formula.”

Terms, structure, taxes, fees, and strategic intent all shape what you actually take home. That’s where the Strategic Transaction Value Lens comes in — and why mastering the Market Lens first is so critical.