If you’re thinking about selling your business, one of the first questions you’re likely to ask is:
How much is my business worth?
There isn’t a single formula that determines the value of every business. Two companies with similar revenue and profits can achieve very different valuations depending on their sector, growth, customer base, management team, recurring revenue and the level of interest from potential buyers.
For many established profitable businesses, valuation starts with maintainable earnings, often EBITDA, and an appropriate valuation multiple. But this is only the starting point.
This guide explains how businesses are valued, what affects valuation and what owners can do to understand, and potentially improve, the value of their business before a sale.
How is a business valued?
There are several ways to value a business, and the appropriate approach depends on the type of company being valued.
Common valuation methods include:
- EBITDA multiples
- revenue multiples
- discounted cash flow
- asset-based valuations
- comparable company or transaction analysis
For many established small and medium-sized businesses, one of the most common starting points is:
Business Enterprise Value = Maintainable EBITDA × Valuation Multiple
For example, if a business generates £1 million of maintainable EBITDA and an appropriate valuation multiple is 5x, its indicative enterprise value would be £5 million.
However, this does not necessarily mean the owner would receive £5 million.
Adjustments may need to be made for cash, debt, working capital and other items to determine the equity value ultimately attributable to shareholders.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation.
It is commonly used in business valuations because it provides a way of looking at the underlying operating profitability of a business before certain financing and accounting costs.
However, buyers will not necessarily take the EBITDA figure shown in your accounts at face value.
They may instead look at maintainable EBITDA or adjusted EBITDA.
This attempts to establish the level of earnings that a buyer could reasonably expect the business to generate under new ownership.
What is adjusted EBITDA?
Adjusted EBITDA takes reported EBITDA and adjusts for items that may not reflect the ongoing performance of the business.
Depending on the circumstances, adjustments might include:
- exceptional or one-off costs
- unusual professional fees
- non-recurring income
- owner-related expenses
- remuneration that is materially above or below a commercial market rate
- costs associated with discontinued activities
Adjustments need to be credible and supportable.
A seller may believe certain costs should be added back to profits, but a buyer will assess whether those adjustments genuinely represent costs that will disappear following the acquisition.
This means that establishing maintainable earnings is often one of the most important parts of determining the value of a business.
What is a valuation multiple?
A valuation multiple represents how much a buyer may be prepared to pay relative to a company’s financial performance.
For example:
£500,000 EBITDA × 4x multiple = £2 million enterprise value
£500,000 EBITDA × 6x multiple = £3 million enterprise value
The difference is significant.
This is why asking “What multiple do businesses in my sector sell for?” is useful, but it does not tell you everything.
The appropriate multiple depends not only on the sector but also on the quality of the individual business.
What affects the value of a business?
Buyers typically consider a combination of financial, commercial and operational factors.
Profitability
Consistent and sustainable profits are generally more attractive than earnings that fluctuate significantly from year to year.
Buyers will want to understand not only how much profit the business generates, but how reliably it can continue generating it.
Growth
A business with a credible track record of growth - and clear opportunities to continue growing - may attract greater buyer interest than a business with declining or stagnant performance.
Buyers will normally assess both historical growth and the credibility of future forecasts.
Recurring revenue
Predictable and recurring revenue can make future earnings easier for a buyer to assess.
Businesses with contracted, subscription or highly repeatable revenues may therefore be viewed differently from businesses that need to generate substantially all of their sales from scratch each year.
Customer concentration
A business that generates a large proportion of revenue from one or two customers may carry greater risk.
If losing one customer would materially affect profitability, a buyer is likely to consider that when assessing valuation.
A diversified customer base can therefore be valuable.
Management team
A business that can operate successfully without its owner is often easier to transfer to a new shareholder.
If most customer relationships, operational knowledge and decision-making sit with one person, a buyer may perceive greater risk.
A strong management team and clear organisational structure can reduce that dependence.
Margins
Buyers will often compare a company’s margins with its historic performance and with similar businesses.
Strong, sustainable margins may indicate pricing power, operational efficiency or a differentiated market position.
Market position
Brand strength, intellectual property, specialist expertise, barriers to entry and competitive positioning can all influence how a buyer views a business.
Sector
Valuation levels vary significantly between sectors.
Software, professional services, manufacturing, healthcare, consumer businesses and construction companies, for example, can have very different business models, risk profiles and valuation characteristics.
Sector multiples should therefore be used as a reference point rather than a definitive valuation.
Does revenue affect business valuation?
Yes, but revenue alone rarely tells the whole story.
Consider two businesses that each generate £5 million of annual revenue.
One generates £1 million of EBITDA while the other generates £250,000.
Their valuations are unlikely to be the same.
Similarly, two businesses with identical revenue and EBITDA could still receive different valuations if one has contracted recurring revenue, diversified customers and an independent management team while the other relies heavily on its owner and a small number of customers.
Buyers therefore tend to look at both the quantity and quality of earnings.
Enterprise value vs equity value: what’s the difference?
This is an important distinction for business owners.
Enterprise value represents the value of the underlying trading business.
Equity value represents the value attributable to shareholders after relevant adjustments.
A simplified calculation might look like:
Enterprise Value
+ Cash
− Debt
+/− Other agreed adjustments
= Equity Value
Working capital can also affect the final amount received by a seller.
The precise calculation will depend on the structure and terms of the transaction.
This is one reason why the headline valuation discussed during a business sale is not necessarily the same as the amount ultimately received by shareholders.
How do buyers decide what a business is worth?
Different buyers may value the same business differently.
A financial investor may focus heavily on future cash flows and the return they could generate from the investment.
A competitor or strategic acquirer may identify additional benefits from combining the businesses, such as access to customers, technology, employees, geographic markets or cost savings.
An individual buyer may have different funding constraints and return expectations again.
As a result, there is not always one definitive market value for a privately owned business.
Ultimately, the price achieved in a transaction depends on what an informed buyer is prepared to pay and what the seller is prepared to accept.
Is the highest valuation always the best offer?
Not necessarily.
The structure of an offer matters as well as the headline number.
For example, consider two hypothetical offers:
Offer A: £5 million, all payable in cash on completion
Offer B: £6 million, comprising £4 million on completion and £2 million dependent on future performance
Offer B has the higher headline valuation, but part of the consideration is dependent on future events.
When comparing offers, sellers should consider:
- cash payable on completion
- deferred consideration
- earn-outs
- retained or rollover equity
- financing conditions
- warranties and indemnities
- conditions attached to completion
- the proposed timetable
The headline valuation is therefore only one part of the overall transaction.
Can I value my business myself?
You can estimate the potential value of your business by looking at its financial performance, comparable businesses and relevant transaction multiples.
This can be useful for establishing an initial range.
However, private company valuation is not an exact science.
Publicly available multiples may relate to businesses that are significantly larger or different from your own, while the details of private transactions are not always publicly disclosed.
If you’re seriously considering a transaction, obtaining an independent valuation or speaking with an experienced adviser can provide a more detailed assessment.
How can I increase the value of my business before selling?
If you are considering selling in the next few years, there may be opportunities to improve both the value and saleability of the business before approaching buyers.
Areas owners may consider include:
- reducing dependence on the founder
- strengthening the management team
- increasing recurring or contracted revenue
- reducing customer concentration
- improving margins
- documenting important processes
- improving management reporting
- securing key customer and supplier contracts
- resolving outstanding legal or regulatory issues
- demonstrating a credible growth plan
Not every improvement will result in a higher valuation multiple, but reducing uncertainty and making the business easier for a buyer to understand can strengthen its position during a sale process.
When should I get my business valued?
You don’t need to be ready to sell before thinking about valuation.
Understanding the potential value of your business can be useful if you’re:
- considering a sale
- planning for retirement
- thinking about bringing in an investor
- considering a management buyout
- developing a succession plan
- planning growth over the next few years
Understanding what currently drives - and limits - the value of your business can also help identify areas to focus on before eventually going to market.
How much could your business be worth?
There is no single multiple or formula that can tell every owner exactly what their business is worth.
Valuation depends on the financial performance of the company, the quality and sustainability of its earnings, its growth prospects, its risk profile and, ultimately, demand from potential buyers.
For owners considering a sale, understanding these factors early can help you prepare the business and make more informed decisions about when - and how - to approach the market.
Explore your options with The Brokerage
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If you’re considering selling your business, you can create a seller profile, present your opportunity and connect with potential buyers while controlling the information you choose to disclose.
You don’t need to be committed to selling to start exploring your options.