How Much Is My Business Worth? A Simple Valuation Guide for Business Owners

If you are asking, “How much is my business worth?” you probably want a useful indication rather than a long explanation of valuation theory.

For many established UK businesses, a simple starting point is:

Adjusted EBITDA × Valuation Multiple = Indicative Enterprise Value

For example, if your business generates £1 million of adjusted EBITDA and an appropriate valuation range is 4-6 times EBITDA, the calculation suggests an indicative enterprise value of between £4 million and £6 million.

But that’s not necessarily what your business is worth.

The real questions are:

Does £1 million accurately reflect the sustainable earnings of the business?

And

Is 4-6x the right multiple for your company?

A business with recurring revenue, strong management and clear growth prospects may attract a higher multiple. Another business generating exactly the same profit could be valued lower if it depends heavily on the owner or a small number of customers.

How Business Valuation Works in Practice

The example below shows how different levels of EBITDA and turnover can translate into indicative values at different illustrative multiples.

Important: These figures are illustrative only. The multiple that may apply to your business will depend on factors such as your sector, size, growth, risk profile and current buyer appetite.

The calculation itself is straightforward.

The more difficult part is deciding what EBITDA figure should be used and what multiple buyers may actually be prepared to pay for your business.

What EBITDA Should I Use to Value My Business?

Buyers should be presented with what is known as adjusted or maintainable EBITDA, rather than simply taking the figure from your latest accounts.

EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation.

Adjustments may then be made for legitimate costs that are unusual, personal or unlikely to continue under new ownership.

For example:

Reported EBITDA: £850,000

Possible adjustments:

• One-off professional costs: +£50,000
• Exceptional relocation costs: +£40,000
• Non-commercial shareholder costs: +£60,000

Adjusted EBITDA: £1,000,000

These adjustments need to be reasonable and defensible. A buyer is unlikely to accept costs being added back simply because doing so produces a higher valuation.

They will also want to understand whether current earnings are sustainable. If profits have risen sharply in the latest year, expect questions about what drove that growth and whether it is likely to continue.

What Can Increase the Value of My Business?

There is no single multiple that applies to every business.

The multiple reflects how attractive the business appears to a buyer and how much risk they associate with its future earnings.

Factors that can support a stronger business valuation include:

• Recurring or contracted revenue
• Consistent revenue and profit growth
• A capable management team
• Low reliance on the owner
• A diversified customer base
• Strong margins
• Reliable financial information
• Clear opportunities for further growth
• Strong market positioning or intellectual property

For example: two businesses both producing £1 million of EBITDA.

One has recurring revenue, a strong management team and no major customer concentration.

The other depends heavily on the owner and one large customer.

The profits may be identical, but the risk to a buyer is not.

That difference can have a direct impact on the EBITDA multiple a buyer is willing to pay and, ultimately, on the value of the business.

What Can Reduce the Value of My Business?

Some of the same factors work in reverse and can put pressure on your business valuation.

Common examples include:

• Heavy reliance on the owner
• High customer concentration
• Falling or inconsistent profits
• Weak management information
• Limited evidence of future growth
• Important contracts that are not properly documented
• Dependence on a small number of employees
• Poor cash conversion
• Significant future investment requirements

These issues do not necessarily make a business unsaleable.

What matters is identifying them early enough to do something about them.

Is My Business Valued on Turnover or Profit?

For most established profitable SMEs, profit is usually more important than turnover alone when valuing a business.

Buyers often focus on EBITDA because it gives an indication of the earnings being generated by the business.

For example, consider two companies with £10 million turnover:

Business A

• Turnover: £10m
• Adjusted EBITDA: £2m

Business B

• Turnover: £10m
• Adjusted EBITDA: £500,000

Both businesses generate the same revenue, but their profitability is very different.

Turnover still matters, but on its own doesn’t show how effectively that revenue converts into profit.

That’s why buyers will often consider turnover, EBITDA and margins together when assessing business value.

When Are Turnover Multiples Used?

Turnover or revenue multiples can be more relevant in sectors where scale, recurring revenue or future growth are particularly important.

This can include certain software, SaaS or high-growth businesses where buyers may place more emphasis on Annual Recurring Revenue, customer retention and future growth.

The basic calculation works in the same way:

Annual Revenue × Revenue Multiple = Indicative Enterprise Value

The table above shows how the same £5 million turnover business could produce very different indicative valuations depending on the revenue multiple applied.

Again, those figures are examples only.

For many established profitable SMEs, EBITDA remains a more useful starting point when working out how much a business could be worth.

Why Might Different Buyers Value My Business Differently?

Your business does not necessarily have one fixed value. Different buyers can place different values on the same company depending on what they are trying to achieve.

A financial buyer may focus primarily on future returns and cash generation. Whereas a strategic trade buyer may see additional value because your business gives them:

• New customers
• New geographical reach
• Specialist capabilities
• Intellectual property
• A stronger market position
• Opportunities to cross-sell products or services

This is why the price achieved in a competitive business sale process can differ from an initial desktop valuation.

A valuation gives you an indication. The market ultimately tests what credible buyers are prepared to pay.

A Real Example: Why Different Buyers Can Value the Same Business Differently

One of the clearest examples of why business valuation should be viewed as a range came from a transaction involving a specialist supplier to the aerospace, defence and oil and gas sectors.

Entrepreneurs Hub identified more than 100 potential acquirers, around 70% of which were international businesses. Following discussions and negotiations, several competitive offers were received, with valuations ranging from around £5 million to more than £6 million.

The underlying business had not changed. What differed was the value individual buyers placed on the opportunity.

This illustrates why a desktop valuation is only a starting point.  Read the full case study in our Sector Update

Finding the right buyers and creating genuine competition can have a significant impact on the eventual sale value.

How Much Would I Actually Receive from a Sale?

The figure produced by  EBITDA × Multiple usually represents an indicative enterprise value.

That is not necessarily the amount shareholders ultimately receive.

The final equity value can be affected by:

• Cash
• Debt
• Working capital
• Surplus assets
• Transaction adjustments

Deal terms matter too.

For example, an offer of £6 million entirely payable on completion is very different from a £6 million headline offer with £3 million on completion and £3 million over the next three years dependant on achieving certain revenue growth targets.

This is why it is essential for business owners to fully understand both the headline price and the terms attached to it.

Why Does the Right Sale Process Matter?

An accurate valuation is only part of the picture. The way a business is positioned, the buyers approached and the level of competition created can all influence the final outcome.

When Entrepreneurs Hub advised Shuretech on its sale to Gunnebo Entrance Control, the process attracted interest from overseas, financial and from trade acquirers. By positioning the business around its strengths in critical infrastructure and data centres, we were able to create competitive tension and keep the owners’ objectives at the centre of the process.

“We had ambitious expectations and a clear target we both wanted to walk away with. The team not only met but exceeded our objectives.”

Lewis Hakesley and Carl Graham, Shuretech

You can read more about the Shuretech deal and watch Lewis and Carl discuss their experience of the sale process in our full Shuretech case study.

How Much is My Business Worth?

If you are trying to work out how much your business is worth, or how much you could realistically sell it for, a useful starting point is to work through four steps.

1. Establish Your Adjusted EBITDA

Look at the sustainable earnings the business generates rather than relying solely on one year’s accounting profit.

2. Consider an Appropriate Valuation Multiple

Take into account your sector, size, financial performance, growth and current buyer appetite.

3. Assess What Could Move the Multiple Up or Down

Look objectively at areas such as recurring revenue, customer concentration, management strength, growth prospects and owner reliance.

4. Consider Deal and Balance-Sheet Adjustments

Remember that enterprise value is not automatically the amount you will personally receive from a business sale.

Understanding Your Business Value Early Gives You More Options

You do not have to be ready to sell to understand what your business could be worth.

In fact, finding out two or three years before a possible sale can be far more useful than waiting until you are ready to go to market.

It gives you time to ask:

• What is the business worth today?
• What could be holding the value back?
• Which areas could I realistically improve?
• What would need to change to reach my exit target?
• What type of buyer might value the business most highly?

If your current valuation is below where you would like it to be, you then have time to strengthen the business before selling.

For practical ideas, read How to Build a Business Buyers Can’t Resist: Growth Tactics That Work

Want to Understand What Your Business Could Be Worth?

If you are considering selling your business over the next few years, understanding your likely valuation range now can help you identify what may strengthen value and where buyers could see risk.

Use our Business Valuation Calculator for an initial indication, or contact us to arrange a short conversation with one of our Directors about your business, your plans and the factors that could influence its eventual sale value.