Is Your Business Worth More Than You Realise?
One of the first steps to selling your company is working out how much it’s worth. As corporate finance experts, a question we hear all the time is, “how do you value a business?”
Our answer always starts with “a business is worth what someone is prepared to pay for it”. Rather than putting a price tag on your business when you take it to market, it will be more beneficial if you provide all the necessary information a potential acquirer will need to make an offer on your business – one that reflects its full worth.
Acquirers will use various methods to help price a business depending on what sector the business operates in and what type of business it is, including: asset valuation, discounted cash flow, rule of thumb, entry costs, price/earnings for listed companies and multiples. With all these aspects taken into consideration, your business could actually be worth more than you realise…
However, as a company director or shareholder, you’re probably looking for guide as to the approximate price category your business falls into. Multiple valuation is one technique you can use to achieve this.
How do you value a business using multiple valuation?
In very simple terms, multiple valuation it’s the profit of the business multiplied by the Industry Average Multiple (I.A.M) (for the sector the business operates in) which then provides you with a basic valuation
Profit x I.A.M = value
Getting into the finer detail
Often the profit figure in any given year may be distorted by exceptional, one-off or non-recurring items which could adversely affect a multiple valuation. If this is the case, then the profit should be adjusted accordingly to truly reflect the worth of the business. These adjustments are called ‘add backs’ (vendor one offs/non-recurring items) and ‘add forwards’ (costs that may be incurred by the new owners moving forward).
Examples of add backs could be items such as director benefits, pension contributions, office refurbishment, redundancy payments, the company’s 25-year celebration party costs, your salary if you are leaving the business, and so on. All these are costs that would not be incurred by the new owners.
An example of an ‘add forward’ might be the cost of a new Sales Manager/Director – if you are the MD of the business and you also currently look after the sales then you will need potentially to be replaced.
A more detailed valuation of your business would take the EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) of the business and then apply ‘add backs’ and ‘add forwards’ to provide an adjusted EBITDA figure which better reflects the true profit of the business.
You need to be fair and realistic with both add backs and add forwards; don’t over egg it otherwise you could come unstuck or you might put your buyer off.
Once these add backs and add forwards have been applied, the result will be an adjusted EBITDA figure, to which you can then apply the industry average multiple to get your guide value.
However, please note that this is only a desktop exercise and does not take in to account the value drivers that are not shown in the accounts, which could add significant value and help increase the multiple. We will share some of those with you in our next blog.
To conclude
Depending on the information you provide and the type of multiple methodology your potential acquirer applies, this could have a significant impact on the value calculated. That’s why you never put a price on your business at the start but present all the necessary information to a potential acquirer and then allow them to value your business. You may be pleasantly surprised.
This article is provided for general information purposes only and is not intended as specific advice for how to value a business.
If you would like advice for your unique business needs and a guide valuation, then please contact us in confidence on 0845 067 8678 or info@entrepreneurshub.co.uk
Similar Insights
FAQs – Selling Your Company
How do I sell my business in the UK?
Selling a business in the UK typically involves preparing financial information, obtaining a valuation, identifying suitable buyers and negotiating the terms of a sale. Most owners work with an M&A adviser to manage the process confidentially, approach qualified buyers and maximise the value achieved.
At Entrepreneurs Hub, we talk about five key areas that make the difference between success and failure when selling your business. Read more…
What is my business worth?
A business is typically valued by applying a multiple to its sustainable profit, often EBITDA or adjusted net profit. The appropriate multiple depends on factors including growth, recurring revenue, customer concentration, management strength, owner dependency, market conditions and buyer demand.
Determining what your business is worth involves more than applying a simple formula. Use our Business Valuation Calculator to obtain an initial valuation range, or read our simple business valuation guide to understand the factors buyers consider.
How long does it take to sell a business?
Selling a business in the UK typically takes around 12 to 18 months from initial preparation to completion, although some transactions may be quicker or take longer. The timeline depends on business readiness, buyer demand, deal complexity, due diligence and how quickly the legal terms can be agreed.
Preparing accurate financial information and organising key documents in advance can help reduce avoidable delays. Read our complete business sale timeline to understand what happens at each stage.
When is the best time to sell a business?
The best time to sell a business is usually when it is performing strongly, its future growth is clear and you are not under pressure to complete a sale. Buyers are generally more attracted to businesses with rising or stable profits, reliable financial information and credible opportunities for further growth.
Business owners are often in a stronger position when:
- Revenue and profits are growing or consistently strong
- Financial records are accurate and up to date
- Future growth opportunities can be clearly demonstrated
- The business is not overly dependent on the owner
- There is a capable management team in place
- The owner has started preparing well in advance
Market conditions can also affect buyer appetite and valuation. Factors such as sector growth, access to finance and competition between buyers may support stronger deal activity, but preparation and business performance are usually more important than trying to identify a perfect month to sell.
Ultimately, the best time to sell is when both you and the business are ready, and the company can demonstrate sustainable performance and future value to potential buyers.
Use our Exit Readiness Tool to assess how prepared your business is, or read our guide on when to sell your business for further guidance.
Do I need an adviser to sell my business?
You are not legally required to use an adviser to sell your business, but many owners appoint an experienced M&A adviser to help manage the process. An adviser can prepare the business for sale, identify and approach suitable buyers confidentially, coordinate negotiations and support the transaction through due diligence.
The right adviser can also help create competitive tension, protect your time and reduce the risk of avoidable mistakes. Read our guide to choosing the right business sale adviser to understand the different types of support available.
How do I prepare my business for sale?
Preparing a business for sale involves strengthening its financial performance, reducing risk and making sure it can operate successfully without heavy reliance on the owner. Buyers will also expect accurate financial records, clear contracts, organised documentation and evidence of future growth.
Preparation should ideally begin well before approaching the market, giving you time to address weaknesses that could affect value or delay the transaction. Use our Exit Readiness Tool to assess how prepared your business currently is.
How is confidentiality protected during a sale?
Confidentiality is protected through controlled information sharing, anonymised buyer approaches and non-disclosure agreements. Potential buyers usually receive limited information at the start of the process and must sign an NDA before commercially sensitive details are released.
Prospective buyers should be assessed before receiving further information, with documents shared gradually according to their level of interest and credibility. A well-managed process also allows the business owner to retain oversight of who is approached and what information is disclosed.
What documents do I need to sell my business?
The documents needed to sell a business commonly include financial accounts, management information, forecasts, customer and supplier contracts, employment records, tax information and evidence of intellectual property ownership.
Buyers may also request details of property, insurance, legal disputes, regulatory matters and company ownership. Organising this information before due diligence begins can reduce delays and help maintain buyer confidence. Our Business Sale Due Diligence Checklist explains the main information buyers are likely to request.
What’s the quickest way to sell a company?
Selling a business quickly is possible, but speed shouldn’t come at the expense of value or deal security Read more…
What’s the best way to sell a business online?
Yes, you absolutely can sell a business online. Many platforms specialise in connecting business sellers with buyers. Read more…
How can I increase the value of my business before selling?
You may be able to increase the value of your business by improving sustainable profits, developing recurring revenue and reducing reliance on individual customers or the owner. Buyers also value capable management teams, reliable financial reporting, scalable operations and clear opportunities for future growth.
The earlier you identify the factors affecting value, the more time you have to make meaningful improvements. Use our Business Valuation Calculator for an initial indication of value and our Exit Readiness Tool to identify areas that may need attention.