How is my business valued?

by Abbas Gulamhusein

Business valuation matters in several contexts. You're thinking about selling the business. You want to bring in a partner or external investor. You're structuring a management buyout. There's a shareholder dispute that needs resolving. You're planning your estate. Or you simply want to know what you've built is worth. The valuation approaches differ depending on the context, but the principle is the same: someone needs to put a number on what the business is worth in today's money.

The EBITDA Multiple Method

The most common valuation method for trading businesses is EBITDA multiples. EBITDA stands for earnings before interest, tax, depreciation and amortisation. It's the operating profit of the business before non-cash charges and financing costs. A buyer or investor applies a multiple to this figure to arrive at a valuation.

A buyer will take your EBITDA and multiply it by a multiple that varies by industry, growth profile, and quality of the business. A stable, mature service business might achieve 4-6x EBITDA. A fast-growing technology business might achieve 10x or more. A cyclical business with volatile earnings might achieve 3-4x. The multiple is the buyer's assessment of how much profit growth and stability they think they're buying.

To illustrate: if your business generates £300,000 EBITDA and the market multiple for your sector is 5x, the valuation would be £1,500,000. The same business achieving a 6x multiple would be valued at £1,800,000. The difference between 5x and 6x is £300,000 of value. That's why the multiple matters.

What Drives the Multiple

The multiple isn't a fixed number for an industry. It varies depending on what the buyer sees when they look at the business. Several factors move the needle significantly. Recurring revenue, or subscription and contract income, is valued higher than one-off project work. If you have contracts in place that guarantee revenue for the next two years, that's worth a higher multiple than if you're hunting for new work every three months.

Customer concentration is a major risk factor. If 40% of revenue comes from one client, buyers apply a discount. If you lose that client, the business loses 40% of profit. That risk brings the multiple down. Diversified revenue across many customers is more stable and gets a higher multiple.

Management dependency is another discount factor. If the business cannot function without the owner, if all client relationships are personal, if key expertise walks out if you walk out, buyers will apply a discount. The business is less valuable because its future is uncertain without you. If you've built a business that runs independently of you and can continue without you, that's worth a higher multiple.

The strength of margins also matters. A business making 20% EBITDA margin on revenue is more attractive than a business making 10% margin. And growth trajectory matters. A business growing at 20% per year is worth more than a flat business with the same current EBITDA.

The Normalisation Process

When a buyer values a business, they don't take the accounts at face value. They normalise EBITDA. They look carefully at costs that aren't legitimately commercial business expenses. Director salaries above market rate get added back. Personal expenses run through the business get added back. One-off costs that won't recur get added back. An item of income that was exceptional gets removed.

This can have significant impact. Imagine your business pays the director a salary of £400,000, but you know a replacement CEO would cost £120,000. That's £280,000 per year that comes out of the salary line. The buyer adds £280,000 back to EBITDA. If your accounts show £400,000 EBITDA, the normalised EBITDA is £680,000. That extra £280,000 gets multiplied by the buyer's multiple.

If your multiple is 5x, that difference is worth an extra £1,400,000 in valuation. Personal expenses like a car, travel, and meals similarly get normalised. If you're running £50,000 per year of personal expenses through the business that don't serve the business, that gets added back.

Asset-Based Valuation

Not all businesses are valued on earnings. Businesses with significant tangible assets, like property companies or asset-heavy manufacturing businesses, are sometimes valued on a net asset basis. You calculate the value of assets the business owns, subtract the liabilities, and that's the valuation. A property company with £5,000,000 of freehold property and £1,000,000 of debt would be valued at £4,000,000 net assets.

Asset-based valuation is less common than EBITDA multiples for trading businesses, but it matters for businesses where the assets themselves have significant value independent of the earnings.

Planning for Valuation

If you're thinking about selling the business in the next three to five years, start thinking about your valuation now. These are the key steps. Normalise your accounts. Add back any personal expenses that aren't legitimate business costs. Review your salary and make sure it's at market rate for the role. If it's significantly above market, bring it down. That alone increases EBITDA and the valuation.

Build recurring revenue where possible. Contracts and subscriptions are worth more than one-off projects. Diversify your customer base so no single customer is more than 10-15% of revenue. Bring in management so the business doesn't depend entirely on you. Document client relationships and standard processes so the business is demonstrably capable of operating independently.

These steps increase both the EBITDA (through normalisation and expense reduction) and the multiple (through reduced risk and management independence). The effect compounds. A business with EBITDA of £500,000 valued at 5x is worth £2,500,000. The same business with EBITDA improved to £600,000 (through expense normalisation and efficiency improvement) and a multiple of 6x (because it's less risky and more management-independent) is worth £3,600,000. That's an extra £1,100,000 from sensible planning over a three-year period.

Getting a Proper Valuation

If you need to know the value of your business, don't guess. Get a professional valuation. A business advisor, accountant, or specialist valuer can provide a properly considered valuation that's credible with banks, investors, or potential buyers. It costs £2,000 to £5,000 depending on the complexity of the business, but it's worth the money if a material financial decision depends on it.

If you'd like to talk through business valuation for your situation or discuss how to position your business for a better valuation, get in touch with us at Saymur.