You know your real number

Every owner has a number in their head. It is built from the inside, over years of hard calls: the salary you skipped, the vacation you missed to make payroll, the customer you fired on principle. It is a fair number. It is also, often, the wrong number to walk into the room with.

The buyer's number is built the other way, from the outside, working backward from a return. A buyer does not ask "what is this business worth." They ask "what can I pay for this business and still hit my target return." Those are two different questions with two different answers. Two rational buyers can be 30% apart on the same company, and both can be right, because each is running their own math.

This is why owners cannot argue the number up in the room. You are defending a life. The buyer is stating a return target. There is no surface where those two arguments touch. The wall you hit in the final negotiation is not the buyer being stubborn. It is the buyer's return target, and the buyer is just delivering the news. The wall moves only when the inputs to the model move, and by the time you are in the room, the inputs are already set.

So the real work is to know three numbers, not one.

The first is enterprise value. This is the headline: profit times a multiple. It is the number everyone quotes. It is also the number people confuse with what they take home.

The second is what you keep. Out of the headline comes debt, fees, taxes, and often an earnout, which is money you only get if the business hits targets after the sale. A deal can close at a strong headline number and still leave you with far less than you pictured. Deals close on the headline. Owners walk away with the structure. Read every offer for what gets paid at close, what gets paid only if targets are met, and under what terms.

The third is your floor. This is the number below which you would rather not sell. It is not a wish. It is the number that funds the life you want after. You need it before the first offer, because the first offer is designed to test it.

Where does the multiple come from? It is roughly the inverse of the buyer's discount rate, and the discount rate is how the buyer gets paid back for risk. Every risk they find raises the discount rate and lowers the multiple. That is the thread that ties this chapter to the other four. Customer concentration, key-person dependency, thin documentation, low recurring revenue: each one is a risk, and each one shaves the multiple. Your number is not one fact. It is the sum of the five.

John Warrillow's Built to Sell named eight value drivers buyers pay for, and most owners have never heard of seven of them. Warrillow, Damodaran's work on private-company valuation, and the Pratt's Stats record all point the same way. The buyer is not guessing, and the buyer is not being unfair. The buyer is running a model you have never seen, on inputs you did not know were inputs.

The gap between your number and the buyer's number has a name. Foundry calls it the Misalignment Tax. Almost all of it is built in the years before the room, not in the room. You close it by knowing your three numbers, and by doing the work on the five risks before the offer arrives, not after.

Know your real number, and the buyer's number stops being an insult. It becomes a math problem. Math problems have solutions.