In short: Most small UK businesses are valued using a multiple of their maintainable profits, an asset-based valuation, or a cash flow forecast. The right method depends on the type of business. A valuation is an estimate, not a price: the final figure depends on buyers, risk and how well prepared your records are, so use a qualified adviser for a sale or tax matter.
You might need a valuation to sell your business, bring in an investor, buy out a partner, plan for retirement or deal with a tax or legal matter. There is no single correct figure. Different methods give different answers, and the real value is what a willing buyer pays.
Start with clean numbers
Every method relies on reliable financial information. Before valuing, gather:
- at least three years of accounts, if you have them
- up-to-date management accounts
- details of assets, debts and stock
- key contracts with customers, suppliers and staff
- any leases, loans and guarantees
If your records are messy, a buyer will see more risk and offer less.
Method 1: earnings multiple
This is the most common approach for profitable small businesses.
- Work out maintainable profit. Start with your profit before tax and adjust for one-off or personal items. For example, add back a one-off legal bill, and adjust the owner's salary to a market rate for someone doing the job.
- Apply a multiple. Multiply the adjusted profit by a figure that reflects risk and growth prospects.
There is no fixed multiple. It depends on your sector, size, growth, how dependent the business is on you, and the wider market. A specialist adviser or business broker can tell you what comparable businesses have sold for.
Some valuers use EBITDA (earnings before interest, tax, depreciation and amortisation) as the profit figure. Make sure you know which measure is being used when comparing figures.
Method 2: asset-based valuation
This adds up what the business owns and subtracts what it owes.
- Net book value uses figures from your balance sheet.
- Adjusted net assets revalues items, such as property or equipment, at their current market value.
It suits asset-heavy businesses, such as property or manufacturing, or businesses that are not very profitable. It often undervalues service businesses, whose value lies in clients and people rather than equipment.
Method 3: discounted cash flow (DCF)
DCF estimates future cash the business will generate and converts it into today's value using a discount rate that reflects risk. It is useful for growing businesses but is only as reliable as the forecasts behind it, so buyers will test the assumptions closely.
Other approaches
- Revenue multiples are sometimes used for fast-growing or subscription businesses with little profit yet.
- Comparable sales look at what similar businesses sold for.
- Entry cost asks what it would cost to build an equivalent business from scratch.
What pushes value up
- steady, growing profits
- a wide spread of customers rather than one or two big clients
- recurring or contracted income
- a business that runs well without the owner
- strong brand, website and reputation
- good systems, records and documented processes
- protected intellectual property, such as trade marks
What pulls value down
- reliance on the owner's personal relationships
- unclear or messy accounts
- overdue filings or tax issues
- disputes, legal claims or unclear ownership of shares
- key staff who could leave
Valuing shares in a limited company
If the business is a limited company, a buyer may purchase the shares or just the assets. A share sale transfers the whole company, including its history and liabilities, so buyers usually carry out detailed due diligence. A minority shareholding is often valued at a discount because it carries less control.
Tax and legal points
Selling a business or shares can have Capital Gains Tax consequences, and some reliefs may apply depending on your circumstances. HMRC may also need a formal valuation in some situations, such as gifts of shares or employee share schemes. These rules are complex, so speak to an accountant or tax adviser before you agree a deal.
Preparing for a sale
- Get your accounts and Companies House filings up to date.
- Tidy up contracts, leases and share records.
- Reduce dependence on yourself by delegating and documenting processes.
- Get an independent valuation.
- Appoint a solicitor experienced in business sales.
How Form My Company can help
We cannot value your business, but we can get its records ready before you approach buyers. Our Compliance and Due Diligence service reviews your company records, our Annual Accounts service keeps filings current, and our Share Issue or Transfer service handles the paperwork when shares change hands.
Frequently asked questions
What is the most common way to value a small business?
Applying a multiple to adjusted, maintainable profits. The multiple depends on sector, size, growth and risk.
What multiple should I use for my business?
There is no fixed figure. A business broker or valuer can tell you what similar businesses have sold for.
Does my business have value if it relies on me?
Yes, but usually less. Buyers pay more for businesses that run well without the owner.
Do I pay tax when I sell my business?
Often Capital Gains Tax applies, and some reliefs may be available. Speak to an accountant before agreeing a sale.