FOMO (Fear of Missing Out) is alive and well in the HVAC Industry. At every industry trade show, there’s at least one presentation by a guy who sold his business for a 6X multiple. The hardworking owner in the audience thinks: Why not me too? I have a great business.

When I talk to owners who are focused on multiples, whether it’s the sale of a competitor in the same market or something they heard somewhere, I try to help them understand that multiples are not what matters. Here’s why.

First, reported sales figures are unreliable, at best. Some owners may be exaggerating, or at the very least, telling you about the number that felt the best to them. By definition, someone who’s telling you about the money he got for his business thinks he got a good deal. No one brags about the bad deal they got.

But here’s the question you have to ask, even if the 6X multiple is true: 6X of what? There are lots of ways to value a business. The broker might have used adjusted EBIDTA (earnings before interest, taxes, depreciation, and amortization) as the base value, but there are plenty of other valuation models to use. If you don’t know what the base value of the company was, there’s no way of knowing what the multiple multiplied.

Then there’s the structure of the deal. Did the owner get cash, or did he have to carry a note? Were there any holdbacks or earnouts based on future performance? Does the owner intend to stay on and work for a couple of years? (Usually without salary.) Is the owner deferring some of the price to take a second bite of the apple?

The point is you don’t know what you don’t know.

That’s why it’s important to stay focused on what you can control: the real value of your business. The only way to compare two companies is by comparing SDE (Seller Discretionary Income.) It’s the bottom line – your real profitability, what a new owner can expect to make each year after he takes over your business.

And for some owners, that’s a murky number. If you take a long hard look at your numbers, are addbacks and perks  making it hard to determine what your real income is? I always advise owners who are thinking about retiring or selling to take the time to clean up their books. Start taking out the addbacks that are an advantage to you but a red flag for buyers.

Personal vehicles, phones and electronics, meals and entertainment – they can add up to tens of thousands of dollars a year that take away from a buyer’s valuation of your company. Once you start to separate the true business expenses from the personal (and eliminate the gray areas), you can start to feel confident that you understand the true numbers.

A buyer will only be interested in – and be able to get funding for – a business that has transparent, well-organized, and accurate records. They need to be confident that they can differentiate between the assets and liabilities of the company and the business owner.

When you understand the number that matters  – your company’s SDE –  you can be confident that you understand its true value. After that, we can start to talk about multiples.