How to value a business

Every company has a valuation, though you may not know what it is at first. And there are plenty of reasons to uncover its valuation, from raising investment to preparing to sell your business.

In the UK, a third of SME-entrepreneurs don’t know what their company is currently worth. So in this article, we’re explaining all – what impacts a valuation, how to calculate it, and even how to increase it.

What is a business valuation?

A business valuation works out how much your company is worth in pounds and pence. It’s often used when selling a business, but it’s also a useful way to measure your business’s financial health and potential.

There are different ways to calculate the value of your business. But at their heart, they all consider your financial performance (as well as other factors, in some cases) to figure out what would be a fair price to value your business at today.

When do you need to know your business valuation?

Valuations aren’t only used when selling a business. They’re useful in a wide range of situations, including when you’re:

• Preparing for a sale, merger, or acquisition

• Raising investment

• Managing partnership changes, buyouts, or shareholder exits

• Planning for succession or retirement as an owner-director

• Handling divorce or inheritance claims involving business assets

• Setting up employee share schemes or incentive plans

• Meeting HMRC and stamp duty requirements, such as gifting shares or probate

What impacts your business’s valuation?

Buyers and investors look beyond just your profit when assessing the value of your business. Here are some of the biggest drivers that can raise or lower your valuation.

How do you value a business?

There are multiple ways of valuing a business, and most owners use two or more methods to get a valuation range rather than a single figure.

Earnings-based valuation

Using an earnings-based calculation is one of the simpler ways to value a business.

Formula

Valuation = Adjusted Earnings * Multiple

Calculation

1. Choose an earnings metric, such as EBITDA or net profit after tax

2. Normalise the earnings by adjusting for one-off costs, owner salary discrepancies, and non-trading expenses

3. Select an appropriate multiple (usually 3-8x) based on sector, size, growth, and risk

4. Apply the multiple to your adjusted earnings to calculate your business’s valuation

Example

Let’s say your net profit after tax is £100,000. After factoring in a recent one-off warehouse upgrade, you adjust this to £120,000. You multiply this by 5, which is commonly used for similar-sized companies in your sector, to get a final valuation of £600,000.

Asset-based valuation

An asset-based valuation is often used by businesses that own lots of assets (such as in manufacturing or real estate), are closing down, or have uncertain future income.

Formula

Valuation = Total Assets - Total Liabilities

Calculation

1. List all your business assets from your balance sheet, including property, equipment, stock, and cash

2. Update the value of each asset to reflect its current market value

3. List all your business liabilities, such as loans, overdrafts, and unpaid supplier bills

4. Subtract the total liabilities from the total assets to find the net asset value

Example

Let’s say your business owns property worth £300,000, equipment worth £100,000, and has £50,000 in cash. Your total assets are £450,000. Your total liabilities, including loans and unpaid bills, amount to £150,000, so your valuation (referred to as ‘net asset value’) would be £300,000.

Discounted Cash Flow (DCF)

A DCF valuation estimates the current value of your business’s future cash flows. It’s a little more complicated than other methods, but it’s useful if your business has predictable, long-term cash flow.

Formula

Valuation = CF₁/(1+r)¹ + CF₂/(1+r)² + … + CFₙ+TV/(1+r)ⁿ

CF1​ = Year one’s cash flow

CF2​ = Year two’s cash flow

CFn ​= Year five’s cash flow (the final forecast year)

TV = Terminal Value (the estimated future sale value at the end of year five)

r = The discount rate​

Calculation

1. Forecast your business’s cash flows for the next five years, using historical performance and contracted revenue as a guide

2. Choose a discount rate (typically your Weighted Average Cost of Capital) based on your business’s risk and cost of capital

3. Estimate the future sale value (Terminal Value): Calculate what your business would be worth if sold at the end of year five. You can estimate this by multiplying your Year 5 earnings by a standard industry benchmark (eg multiplying profit by 4x or 5x).

4. Discount each year’s projected cash flow back to its present value using the discount rate

5. Add up all the discounted cash flows to get the present value of your business

Example

• Let’s say your projected cash flows for the next five years are £100,000, £120,000, £140,000, £160,000, and £180,000

• Using a discount rate of 10%, you’d calculate the present value of each individual year’s cash flow (eg £100,000 / 1.10 = £90,909)

• To include the future sale value, you apply a 5x industry benchmark multiple to your Year 5 earnings (£180,000) to find a Terminal Value of £900,000

• When you discount all five years of cash flows plus that final £900,000 back to today's value, you add them all up to reach an accurate total business valuation of £1,075,144

Comparable company analysis

This method values your business by comparing it to similar companies in your industry. To pull it off, you’ll need access to other companies’ financial information, which usually means narrowing comparisons down to publicly listed companies.

Calculation

1. Find 3-5 comparable businesses in your sector with similar size, geography, and business models

2. Note their valuation metrics, such as Price-to-Earnings (P/E), EV/EBITDA, or Price-to-Sales (P/S) ratios

3. Calculate the average multiple from these comparables

4. Apply the average multiple to your business’s corresponding financial metric (eg revenue or EBITDA) to estimate its value

Example

Let’s say you find that comparable companies in your region trade at an average P/S ratio of 4x. If your annual revenue is £2 million, your implied valuation would be £8 million.

Which valuation method should you choose?

The right valuation method for your business will depend on your type of business and financial situation.

• Profitable SME with stable earnings? An earnings-based valuation will likely work best for your business, as it focuses on your sustainable profit and what a buyer would pay for it.

• Asset-heavy business (eg property, equipment, manufacturing)? An asset-based valuation may be most suitable due to the significant value tied up in your tangible assets.

• High-growth or scalable business with predictable cash flow? The Discounted Cash Flow method can make sure you capture the value of your future earnings potential.

• Operate in an active M&A sector with clear competitors? Comparable company analysis can help you benchmark your business against similar companies in the market.

Examples of valuing a business

It can help to visualise the process using real-world examples. So here are three fictional examples of UK SMEs to show you how they might approach valuing their business.

The local plumbing and heating company

Jamie runs a small plumbing and heating business in Manchester, generating £400k in revenue and £60k in adjusted EBITDA, with modest assets and minimal debt. They use an earnings-based valuation (4x EBITDA) to arrive at £240k. They cross-check the amount with an asset-based valuation (£40k net assets), account for their ‘key-person’ risk, and settle on a range of £200k-260k.

The small manufacturing firm

Annia owns a Birmingham-based manufacturing firm with £1.2 million revenue, £120k EBITDA, and significant plant and property assets. She starts with an asset-based valuation (£600k net assets) and confirms it with an earnings-based valuation (5x EBITDA = £600k), leading to a combined valuation of £600k-700k.

The niche software/SaaS business

Samir’s London-based SaaS business, with £800k ARR and £80k EBITDA, has strong growth potential. He uses comparable company analysis (6x ARR = £4.8 million) and a DCF analysis to support a similar or higher figure, settling on a valuation of £4.8-5 million.

How can you increase the value of your business?

If you’re planning to sell, raise finance, or simply make your business more valuable, the following actions may help:

• Keep your financial records accurate and up to date for a buyer to understand and trust

• Remove personal or one-off expenses from your profits to show your business’s true earning potential

• Avoid relying too much on a single customer, and try to spread your revenue across multiple clients

• Build a strong team that can run the business without you being involved in every decision

• Write down how your business operates and ensure you own all intellectual property, contracts, and data

• Shift to subscriptions, retainers, or long-term contracts to create predictable, recurring revenue

• Manage stock efficiently and negotiate better payment terms with suppliers to improve cash flow

• Create a realistic 12-24 month growth plan with clear assumptions and evidence

• Review your pricing and costs to improve profitability without losing customers

• Start improving your business’s value 12-24 months before you plan to sell or raise finance

Wrapping up

We often hear about business valuations when a company raises a round of funding or is acquired by a competitor. But there are many more reasons to value a business, from setting up share schemes to buying out a director. Whatever your plans, knowing the value of your business gives you the clarity to approach your goals with confidence.

Here’s a reminder of the key points:

• A business valuation determines what your company is worth in monetary terms

• You might need a valuation for reasons beyond selling, like raising finance or planning for succession

• Factors like tangible and intangible assets, financial performance, and market conditions all impact your valuation

• Common valuation methods include earnings-based, asset-based, DCF, and comparable company analysis

• Most owners use two or more methods to establish a valuation range

• Professional advice is recommended for formal situations like sales or tax purposes

Business valuation FAQs

Can you value a company yourself?

Yes, you can estimate a value yourself by using simple methods like book value or basic earnings multiples. Self-valuations are best used for internal planning and early-stage preparation. For formal purposes (eg sale, investment, tax, disputes), buyers, investors, and HMRC usually expect a professional valuation report with clear calculations and justification. This can be done by a chartered accountant or RICS-registered valuer.

What’s the simplest way to value a business?

The quickest practical approach to get a rough valuation is to:

1. Take your latest profit after tax or EBITDA from your accounts

2. Apply a rule-of-thumb multiple for your sector (eg 3-6x)

3. Cross-check against net assets (total assets minus liabilities) to make sure the valuation is realistic

This will give you a ballpark range to work with, but it should be refined with more detailed analysis (and for important decisions, professional advice) before you rely on it.

Photo by charlesdeluvio on Unsplash