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Business value

Understanding what your business is worth

Most SME businesses are valued by applying a multiple to their maintainable, normalised earnings (often EBITDA) to reach an enterprise value. Shareholders then receive the equity value: enterprise value adjusted for cash, debt and working capital, less costs and tax, and subject to how the price is structured.

On this page
  1. How much is a business worth?
  2. EBITDA and maintainable earnings
  3. Valuation multiples
  4. Factors that affect value
  5. Key terms
  6. Preparing for a better valuation
  7. Valuation is not the same as deal value
  8. Formal valuations

How much is a business worth?

There is no single correct figure. A valuation is a reasoned opinion based on profit, risk and the outlook for future earnings, and different methods and buyers can produce different answers. Our article on why business valuations vary explains the main reasons, and why value lies in future earnings explains why buyers look forward rather than back.

How business value is built up

Reported profit
Adjusted EBITDA: profit normalised for one-off items and owner costs
× Valuation multiple: reflects risk, growth and transferability
= Enterprise value: the value of the business operations
± Cash, debt and working capital
= Equity value: what the shares may be worth

Multiples vary by sector, size and risk; a realistic view comes from evidence, not rules of thumb.

EBITDA and maintainable earnings

Buyers usually start from EBITDA and then normalise it to reach the profit they believe the business can sustain under new ownership. Typical adjustments include:

  • Replacing owner salaries and benefits with a market-rate cost for the role.
  • Removing genuinely one-off income or costs.
  • Excluding personal or non-business expenses.
  • Adjusting rent or other related-party arrangements to market terms.

Each adjustment needs evidence. Unsupported add-backs are commonly challenged in due diligence. See what buyers look for in the valuation process.

Valuation multiples

A multiple expresses how many years of maintainable earnings a buyer will pay for. It reflects risk and growth: lower risk and more reliable growth generally support a higher multiple. Multiples vary by sector, size and market conditions, so published averages are a poor guide to any individual business. Read the key factors influencing valuation.

Factors that affect value

  • Dependence on the owner for customers, sales or operations.
  • Customer concentration and the length of contracts.
  • Recurring or repeat revenue.
  • The strength of the management team below the owner.
  • Quality and reliability of financial records.
  • Credible, evidenced growth prospects.

Some of these matter more to trade buyers than profit alone. See hidden factors that affect SME valuations and our guide to selling to a trade buyer.

Key terms

EBITDA

Earnings before interest, tax, depreciation and amortisation, a common proxy for operating cash profit.

Maintainable earnings

The level of profit a buyer believes the business can sustain, after normalising one-off or owner-specific items.

Enterprise value

The value of the business operations as a whole, independent of how it is financed.

Equity value

Enterprise value plus surplus cash, less debt and debt-like items, adjusted for working capital; broadly what shareholders receive before costs and tax.

Cash-free, debt-free

A pricing basis in which the seller keeps surplus cash and repays debt, so the headline price assumes neither.

Normal working capital

The level of stock, debtors and creditors needed to run the business; the price is usually adjusted if actual working capital at completion differs.

Goodwill

The value of the business above its identifiable net assets, reflecting reputation, customers and earning power.

Preparing for a better valuation

Value is usually improved over years rather than months: reducing owner dependence, broadening the customer base, documenting processes and producing reliable management accounts. Practical steps are covered in steps to maximise value before you exit and ways to increase value even if you are not selling. Our sale process section explains how preparation feeds into the sale itself.

Valuation is not the same as deal value

An indicative valuation is an opinion. What an owner ultimately receives depends on buyer competition, structure (deferred payments, earn-outs), completion adjustments, fees and tax. See the pros and cons of different payment structures.

Formal valuations

An independent valuation can test expectations before a sale. Formal valuation services and calculators are provided by our sister resource BusinessValuation.co.uk. Common questions are answered in our valuation FAQs.

What to read next

Have another question about your business sale?

Value & saleability

What your business may be worth and whether buyers will want it

Value and saleability are different questions. A business can have a respectable theoretical value yet attract few credible buyers, while another with lower profits sells readily because it transfers cleanly. An initial discussion can help you understand which factors are most likely to influence both in your case.

Factors an adviser would typically consider

  • Turnover and adjusted profitability, and how sustainable those earnings are.
  • Customer concentration and the strength of recurring revenue.
  • How dependent the business is on you and how strong the management team is.
  • Sector attractiveness, growth opportunities and current buyer appetite.
  • Working capital needs and how easily the business would transfer to a new owner.

This is an initial discussion of the factors involved, not a formal valuation or a sale price. A formal valuation, where needed, is a separate exercise.

Request an Initial Value & Saleability Discussion

Confidential and without obligation. Submitting an enquiry does not create an advisory engagement.