It is the question every owner eventually asks, and the one with the least satisfying answer: a business is worth what someone will pay for it. That is true but useless. In practice buyers, investors and courts all use a small number of recognised methods, and understanding them tells you not just what your business is worth today, but which levers actually change it.
Why you need a number
Valuations are not only for sales. They arise on bringing in a shareholder, buying out a departing one, a share-for-share exchange, granting EMI options (which need an agreed valuation), raising investment, divorce, and probate. The purpose matters, because the same business can legitimately carry different values in different contexts.
Method one: a multiple of profit
The standard approach for a profitable trading SME. You take a maintainable profit figure, usually EBITDA (earnings before interest, tax, depreciation and amortisation) or adjusted operating profit, and apply a multiple.
The profit figure must first be normalised, and this is where most owner-managed businesses gain or lose the most:
- Add back the owner's excess remuneration and replace it with the market cost of employing someone to do the job. An owner drawing well below market rate flatters profit; one drawing far above it depresses profit.
- Strip out one-offs, a legal settlement, a grant, a bad debt that will not recur.
- Remove personal or non-trading costs running through the business.
- Adjust for related-party rent paid to the owner above or below market rate.
Multiples vary widely by sector, size and quality, and they move with market conditions. Smaller owner-managed businesses commonly transact in the low-to-mid single digits of EBITDA; businesses with recurring revenue, genuine growth and depth of management attract materially more. Treat any published "average multiple" as a starting conversation, not a valuation.
Method two: discounted cash flow
DCF projects the future free cash flows of the business and discounts them back to a present value at a rate reflecting risk. It is the most theoretically sound method and the most sensitive to assumptions, small changes in growth rate or discount rate swing the answer enormously. It suits businesses with predictable, contracted cash flows, and is treated sceptically for small businesses whose forecasts depend heavily on the owner.
Method three: asset-based
Value the net assets, adjusted to market value. This suits property and investment companies, asset-heavy businesses, and any business being valued on a break-up basis. For a profitable trading company it usually sets a floor rather than the answer, because it ignores goodwill entirely. If a profit-based valuation comes out below net asset value, that itself is telling you something.
What moves the multiple more than profit does
Two businesses with identical profits routinely sell for very different prices. The differences are almost always these:
- Owner dependence. If the business cannot run without you, the buyer is purchasing a job. This is the single biggest discount applied to owner-managed businesses.
- Customer concentration. One client at 40% of revenue is a risk that gets priced in hard.
- Recurring or contracted revenue versus project work won afresh each year.
- Depth of management below the owner.
- Quality of records. Clean, timely management accounts and a defensible balance sheet shorten diligence and reduce the buyer's perceived risk. Messy records invite price chips, as our note on M&A tax due diligence explains.
- Growth trajectory and margin trend, direction matters as much as level.
Value is built, not negotiated
Every factor above takes one to three years to change. That is why valuation belongs in the planning conversation years ahead of a sale, not in the deal room, exactly the argument in our guide to exit readiness, and why the Business Asset Disposal Relief conditions need meeting well before completion.
We prepare valuations for transactions, share schemes and planning, and, more usefully, work with owners on the factors that raise the number, through our business advisory service. If you want to know where you stand and what would move it, book a valuation conversation.