In short: A valuation multiple estimates what a business is worth by multiplying a financial measure – often EBITDA, profit or revenue – by a number based on similar businesses. Private companies usually get lower multiples than listed ones because their shares are harder to sell. The right multiple depends on the sector, size, growth and risk, so any figure is only a starting point.
What is a valuation multiple?
A multiple is a shortcut for valuing a business. You take a financial figure, such as annual profit, and multiply it by a number that reflects what buyers have paid for similar businesses.
For example, if a business has adjusted annual profit of £200,000 and similar businesses sell for four times profit, a rough value would be £800,000. The number "four" is the multiple.
Multiples are popular because they are simple and easy to compare. But they hide many assumptions, so they work best alongside other methods.
Common multiples
- EBITDA multiple: EBITDA means earnings before interest, tax, depreciation and amortisation. It shows the operating profit of the business before financing and accounting choices. It is widely used for established, profitable companies.
- Earnings (P/E) multiple: price divided by profit after tax. More common for listed companies.
- Revenue multiple: value as a multiple of sales. Used for young, fast-growing businesses that are not yet profitable, such as some software firms.
- Sector-specific multiples: some industries use their own measures, such as recurring fees for an accountancy practice.
Enterprise value and equity value
Multiples like EBITDA usually give the enterprise value – the value of the whole business, before considering debt and cash. To get the equity value (what the shares are worth), you usually:
- Start with enterprise value.
- Subtract debt, such as bank loans.
- Add surplus cash.
- Adjust for working capital, if agreed.
This is why two businesses with the same profit can sell for very different amounts to their shareholders.
Adjusting the profit figure
Buyers rarely use the profit in your accounts as it stands. They "normalise" it by removing one-off or unusual items, such as:
- a one-off legal bill or big repair
- directors' salaries that are far above or below market rates
- personal costs run through the company
- income that will not continue after a sale
Clear, accurate accounts make this easier and more convincing.
What affects the multiple
Higher multiples usually go to businesses with:
- steady, recurring income
- growth that can be shown in the numbers
- a broad customer base, with no single customer dominating
- a strong management team that does not depend on the owner
- good systems, contracts and records
- a sector buyers find attractive
Lower multiples are common when a business is small, depends on one person, has a few big customers, or has unclear records.
Why private companies get lower multiples
Shares in a private company cannot be sold on a stock market, so they are less "liquid". Buyers take on more risk and often have less information. As a result, private companies usually sell for lower multiples than similar listed companies. Small minority shareholdings may also be valued at a discount, because they do not give control.
Where multiples come from
Advisers compare your business with:
- recent sales of similar private businesses
- listed companies in the same sector, adjusted for size and risk
- industry reports and their own deal experience
Be careful with multiples you read online. Published figures can vary widely and may not match your sector, size or region.
When you might need a valuation
- selling the business or bringing in an investor
- issuing or transferring shares between family members or staff
- setting up an employee share scheme
- a shareholder leaving the company
- divorce, inheritance or tax planning
Some of these have tax consequences, and HMRC may want to agree the value. Use a qualified accountant or valuer for anything formal.
How Form My Company can help
We do not value businesses, but we help you get ready for a sale or investment. Clear annual accounts make your profit figures credible. When shares change hands, our Share Issue and Transfer service handles the documents and filings, and our Compliance and Due Diligence service can check your company records before a buyer does.
Frequently asked questions
What is a typical valuation multiple for a small UK business?
There is no single figure. Multiples depend on the sector, size, growth, risk and the buyer. An accountant or valuer can find recent comparable deals for your sector.
What is EBITDA?
Earnings before interest, tax, depreciation and amortisation. It is a measure of operating profit often used to value established businesses.
Why are private companies valued at lower multiples?
Their shares are harder to sell than listed shares, and buyers often have less information, so they accept more risk and pay less.
What is the difference between enterprise value and equity value?
Enterprise value is the value of the whole business. Equity value is what the shares are worth after taking away debt and adding surplus cash.