Guide · · 9 min read · Oleksandr Liakhovets
How to value a business in the UK: methods, multiples and a worked example
Most small and mid-sized UK companies are valued by multiplying adjusted profit by a multiple that reflects the sector, size and risk. This guide shows how to get the profit figure right, which multiples apply, what moves them and how the sums work in practice, and our calculator gives you a quick estimate for your own business.
What is a business worth? The short answer
For most companies turning over anything from a few hundred thousand to tens of millions of pounds, the formula is simple: enterprise value = adjusted profit × multiple. The hard part is agreeing what counts as profit and which multiple is fair for your business.
Enterprise value is not what the owner walks away with. It is calculated as if the company had no debt and no surplus cash. When you sell your shares, you receive enterprise value less debt plus surplus cash, adjusted for the working capital the business needs to trade normally.
The three valuation methods
UK advisers use three main methods.
| Method | When it fits |
|---|---|
| Earnings multiple (EBITDA or SDE) | A profitable business with a steady track record, and the main method for small and mid-sized companies |
| Discounted cash flow (DCF) | A business with contracted or recurring revenue and forecasts that are easy to follow |
| Net assets | A business with a large share of equipment, stock or property, or a loss-making one |
Discounted cash flow in plain terms
DCF asks what the money the business will earn in the coming years is worth today. You forecast free cash flow several years ahead and discount it back to today's value. The higher the risk, the higher the rate and the lower the valuation. The weak point is the forecast. Buyers are always sceptical of a seller's optimistic plans, so for smaller companies DCF is rarely the main method.
Net assets
Here you add up what the business owns and take away what it owes: equipment, stock, property and debtors, less loans and other liabilities. For a stock-heavy trading business or a manufacturer with expensive machinery, it shows the price below which selling makes no sense. For a service business, where the value lies in clients and people, it says little about what the company is really worth.
In practice valuers use more than one method and check whether the results agree. Net assets usually mark the floor, and DCF acts as a cross-check on the multiple rather than a replacement for it. Replacement cost, or rules of thumb such as "three years' profit", are fine for a first rough idea and not much more.
EBITDA and adjusted EBITDA
EBITDA is earnings before interest, tax, depreciation and amortisation. It is the usual starting point because it shows what the business itself earns, regardless of how it is financed or how depreciation is charged. A quick way to work it out is operating profit plus depreciation and amortisation.
A buyer, though, cares about what the business will earn once you have gone, not the EBITDA in your accounts. So the figure is adjusted, and this is where most arguments start. Typical adjustments, often called add-backs, include:
- an owner's salary above or below the market rate for a hired managing director
- personal expenses put through the company
- one-off costs such as an office move, a legal dispute or repairs after an accident
- one-off income that will not recur
- rent paid to a connected party above or below the market rate
- family members who are paid but do not work in the business, or who work in it unpaid
Every adjustment needs paperwork behind it. The buyer and their accountant will test each one during due diligence and strike out anything you cannot evidence.
SDE: valuing a smaller owner-run business
Where the owner runs the business single-handed and is in effect the managing director, buyers more often look at SDE, or seller's discretionary earnings. This is profit with the owner's salary and other discretionary spending added back. A buyer who will run the business themselves gets both the profit and that salary.
SDE multiples are usually lower than EBITDA multiples for mid-sized companies, because the business leans more heavily on one person. Our business valuation calculator follows exactly this logic: net profit plus the owner's salary, multiplied by the multiple for your sector.
Valuation multiples by sector
Your sector sets the starting range, not the final price. The ranges below are indicative multiples of enterprise value to adjusted EBITDA for private deals involving small and mid-sized businesses.
| Sector | Indicative EBITDA multiple | What moves it |
|---|---|---|
| Technology and software | 6x–12x | Recurring revenue, low customer churn, owned intellectual property |
| Healthcare and care services | 5x–10x | Licences, staff retention, occupancy |
| Manufacturing and engineering | 4x–7x | Order book, condition of equipment, reliance on large customers |
| Business services | 4x–8x | Contract length, reliance on key people, margin |
| Retail and e-commerce | 3x–6x | Stock turn, sales channels, leases |
| Construction and trades | 3x–5x | Order book, reliance on subcontractors |
The smaller the business, the closer it usually sits to the bottom of its range. Multiples from news stories about big deals do not apply to small companies. A handful of large sales pull the average up, while the median deal is noticeably more modest.
What pushes the multiple up or down
| Pushes it up | Pulls it down |
|---|---|
| Steady profits over several years | One good year among weak ones |
| Recurring or contracted revenue | One-off orders |
| The business runs without the owner's daily involvement | Everything depends on the owner |
| No single client accounts for a large share of revenue | A few clients bring in most of the revenue |
| Written contracts with clients and suppliers | Handshake agreements |
| Several sales channels and suppliers | One marketing channel or one supplier |
| Tidy accounts and paperwork | Arrears with HMRC, unresolved disputes |
A worked example
Take a hypothetical business services company with a turnover of £2.4m. The figures are made up purely to show how the sums work.
| Step | Amount |
|---|---|
| Operating profit per the accounts | £230k |
| Add depreciation | £30k |
| Reported EBITDA | £260k |
| Add back owner's salary above market rate | £25k |
| Add back one-off cost of an office move | £15k |
| Less market-rent adjustment on premises let by a connected party | £10k |
| Adjusted EBITDA | £290k |
| Multiple, given the sector and risks | 4x–5x |
| Enterprise value | £1.16m–£1.45m |
| Less bank loan | £200k |
| Add surplus cash in the bank | £100k |
| Equity value to the owner | £1.06m–£1.35m |
Now take a smaller business run by its owner alone: net profit of £60k, the owner's salary of £40k and one-off costs of £5k give SDE of £105k. At an assumed multiple of 2.5x, the indicative value is around £260k. The real multiple depends on the sector, how stable profits are and how easily the business can pass to a new owner.
Goodwill: what a buyer pays for beyond the assets
Goodwill is the difference between the price paid for a business and the value of its net assets. A buyer pays it for the client base, reputation, team, established processes and position in the market. The less the business depends on its owner and the steadier its profits, the more goodwill a buyer is prepared to pay for. If everything rests on the owner's personal relationships, goodwill can shrink sharply on a sale.
A sale valuation or a formal valuation report?
For negotiating with a buyer, a reasoned range from a broker or an accountant is usually enough. It shows what you can realistically expect and helps you set an asking price. A formal report may be needed for other purposes, such as tax matters, shareholder disputes or a divorce. Ask your accountant or solicitor which one you need.
Common owner mistakes when valuing a business
- Using the average multiple from the news.Big deals inflate the average. A small company should expect less, and a price built on a headline multiple puts buyers off.
- Working from turnover instead of profit.Two companies with the same turnover can make very different profits, and profit is what a buyer pays for.
- Adding back everything you can think of.A buyer will reject add-backs without evidence, and excessive ones make them doubt every other number.
- Valuing the business with you still in it.If clients drift away once you leave, a buyer will price that in, even if you agree to stay on for a handover period.
- Forgetting about debt and working capital.Enterprise value and the sum you receive for your shares are two different things.
- Valuing on your best year.Buyers look at several years, and one strong year among weak ones changes little.
How to raise the value before you sell
The multiple depends not only on the sector but on how easy the business is for a buyer to understand and how safe it looks. So even a year before a sale you can make a real difference to the price:
- get the finances in order: clear accounts, business and personal spending kept apart, up-to-date management accounts
- reduce dependence on you by writing down processes and handing key client relationships to the team
- widen the client base so no single client accounts for too large a share of revenue
- put agreements with clients and suppliers in writing
- tidy up the brand, the website and how the business looks to a buyer
These are the first things we work on when preparing a business for sale with its owner. You can read more about how we sell a business.
Documents you need for a valuation
- annual accounts for the last three years
- management accounts for the current year
- a breakdown of revenue by client and by sales channel
- a list of profit adjustments with supporting evidence
- a schedule of assets, stock and liabilities, including loans
- key contracts with clients, suppliers and your landlord
A buyer will ask for the same documents, so having them ready early makes the valuation more accurate and negotiations smoother.
Tax and what you actually take home
The value of the business and the amount left in your pocket after the sale are not the same thing. What you keep depends on how the deal is structured (share sale or asset sale), on Capital Gains Tax and Business Asset Disposal Relief, and on how and when you are paid. We cover this in detail in our guide on how to sell a business in the UK. If you are looking to buy rather than sell, browse our businesses for sale.
