How much is my business worth?
Valuing a private company means separating the size of the business from its ability to generate cash year after year, and then working out how much of the enterprise value belongs to the shareholders.
The starting point is profit, and turnover comes second
Turnover tells a buyer how big your business is. It says very little about what it is worth. Two companies turning over £2m, one making £300,000 of operating profit and the other £40,000, can be worth very different amounts because of margin, repeat revenue, the investment they need and the risk a buyer takes on.
Buyers look at how much cash the business can generate, year after year, with an organisation that will still work after you leave. For most UK owner-managed companies the starting point is normalised EBITDA. It does not replace a look at working capital, capital expenditure, debt or the quality of the business, but it is the number the conversation usually begins with.
Revenue multiples have their place. They are used where profit is not yet representative, such as a fast-growing software company, or where recurring revenue lets you compare businesses on a like for like basis. Even then, a buyer will check margin, cash conversion, growth and investment needs before agreeing a figure.
Three common valuation approaches
Comparable multiples
You look at the multiples paid in comparable deals, or the multiples of comparable companies, and adjust them for the specifics of your business. This is the approach most advisers lead with because it ties the valuation to what buyers are paying. Its weakness is data: private deal information in the UK is patchy, and two companies in the same sector with the same EBITDA can deserve different multiples.
Discounted cash flow
You forecast the future cash flows and discount them back to today at a rate that reflects the risk. The logic is sound, but the answer is very sensitive to growth, margins, investment, working capital, the discount rate and the terminal value. For a smaller company the business plan has to be tested against the track record and against sensible downside scenarios.
Net asset value
Assets minus liabilities, adjusted to market value where needed. It matters most for property holding companies, asset-heavy businesses and companies whose profits do not justify the value of what they own. It is not automatically a floor: a liquidation carries costs, tax, time and forced sale discounts.
In practice an adviser will often use multiples as the central reference, test them against cash generation and look at net assets where relevant. Different methods giving different answers are not averaged mechanically. The adviser explains the gap in light of the business model and the purpose of the valuation.
The formula and the bridge to the shareholder
enterprise value - net debt ± working capital and other adjustments = equity value
The first line estimates the value of the business. The second gives the value of the shares, which is what the shareholders are actually paid for.
Most UK deals are priced on a cash-free, debt-free basis with a normal level of working capital. The buyer agrees an enterprise value, then adjusts it for whatever the parties define as debt, cash and working capital. A business valued at £3m with £1.5m of net debt would have, before other adjustments, an equity value of £1.5m.
Bank debt is only part of it. Depending on how the share purchase agreement defines things, debt can also include director loans, hire purchase and finance leases, HMRC Time to Pay arrangements, corporation tax owed for the period before completion and other debt-like items. Disputes and claims can be handled through price, specific indemnities or a retention. None of this is automatic, and our article on net debt and equity value sets it out in detail.
Where the multiple comes from
The sector gives you a reference point. It does not hand you a multiple. Where your company sits within a range depends on operating, financial and risk factors that buyers weigh together.
The factors buyers look at most closely include:
- Dependence on the owner. If customer relationships, decisions and key knowledge sit with one person, the buyer carries more transition risk.
- Recurring revenue. Renewable contracts, high customer retention and a visible pipeline tend to support a higher multiple.
- Customer concentration. One customer making up a large share of sales can change the structure of the deal as well as the price, for example through an earn-out.
- Size. It affects how many buyers can do the deal, how much bank funding is available and how heavily fixed deal costs weigh.
- Quality of information. Reliable monthly management accounts make it easier to verify profits and reduce the uncertainty a buyer prices into the offer.
Our valuation tool takes these factors into account and shows how each one moves the indicative range.
The four valuation mistakes we see most often
Confusing enterprise value with what you will be paid
Someone tells you your company is worth £4m and you hear that you will receive £4m. You may not. Always ask whether the figure is enterprise value or equity value, and which adjustments are still to come.
Applying the multiple to the EBITDA in your accounts
Many owner-managers pay themselves a small salary and take the rest as dividends, which are not an expense in the profit and loss account. The EBITDA in the accounts can therefore be higher than a buyer will accept once a market-rate managing director is costed in. It has to be normalised before any multiple is applied.
Adding the property on top of the business value
If the premises are included in the sale and valued separately, EBITDA must carry a market rent so that the property is not counted twice. If the property stays in the company, its treatment has to be consistent with the method and the scope of the deal.
Using multiples from large deals
Published indices such as the BDO Private Company Price Index track larger transactions and regularly show multiples of 9x or more. Applying those figures to a company with £300,000 of EBITDA without adjusting for size, liquidity, growth, debt and quality of earnings sets an expectation that buyers will not meet.
How to use a value range
A value range helps you make three practical decisions.
Whether now is the right time to sell. If the number is a long way from what you need for the next stage of your life, the question changes from how to sell to what needs to change for the business to be worth that much, and how long it will take.
Where to focus your preparation. Putting a figure on the effect of owner dependence, customer concentration or poor information lets you spend time on the improvements that most reduce risk for a buyer.
How to respond to an approach. If a buyer contacts you out of the blue, a well founded range lets you judge the offer and the adjustments on a consistent basis.
Frequently asked questions
Can I trust an online valuation calculator?
It can give you a first indication if it explains the metric, the multiple, the treatment of debt and cash and the assumptions behind it. It cannot replace a valuation that looks at your financial information, comparable deals, risks and the shape of the transaction.
How often does the value of my business change?
It moves with your results and prospects, the cost of borrowing, buyer appetite and the comparable deals available. Losing a key customer, a change in the management team or missing your budget can shift the range faster than any sector average.
My accountant says the business is worth its net assets
Net assets on the balance sheet are a historical accounting figure, not a market value. A company with £200,000 of net assets can sell for £2m if it generates £400,000 of recurring EBITDA. The reverse also happens: high net assets with no profit usually point to idle assets worth less than the balance sheet says.
