In short: To value a business you start with its sustainable earnings, adjust them to reflect what a new owner would actually inherit, then apply a business valuation method appropriate to the type of business and the reason the figure is needed. The most common approach for owner managed companies is a multiple of adjusted profit, but discounted cash flow, asset based valuation, market comparables and entry cost each suit different situations and each produces a different answer. The method matters less than the adjustments and the risk assessment behind it, which is where most self valuations go wrong.
This guide sets out how to value a business at a level any owner can follow, what a professional business valuation adds beyond that, and why the figure moves depending on who is asking.
Owners tend to ask how much the business is worth as though there is a single figure waiting to be found. There is not. Value depends on who is buying, why they are buying, and what they believe will happen after you leave. What a valuation gives you is a defensible view of that range, and an understanding of what is holding the figure down.
For most owner managed businesses, worth is a function of two things: how much profit the business sustainably generates, and how confident a buyer is that the profit will continue without you.
The first is arithmetic. The second is judgement, and it is where nearly all the variation between two similar businesses comes from. Two companies reporting the same profit can be worth substantially different amounts because one has contracted revenue, a management team and clean records, while the other has a handful of customers who deal only with the owner.
That means the question behind the question is usually more useful. Not what is it worth today, but what is stopping it being worth more. Our complete guide to business exit planning works through what buyers assess and in what order.
Every business valuation starts here rather than with a method. Before a multiple or anything else is applied, reported profit is normalised. A buyer is not interested in what the accounts say. They are interested in what the business would earn under their ownership.
That means removing income and costs that will not recur, such as one off contracts or exceptional expenses. It means adjusting the owner's remuneration to a market rate for the job actually done, which cuts both ways depending on whether you have been paying yourself too much or too little. It means stripping out personal costs run through the business, and adding back anything a buyer would not need to spend.
Owners are frequently surprised at this stage. The profit figure they have been managing to is rarely the profit a buyer prices from.
Five approaches account for most valuations, and each answers a slightly different question.
Adjusted profit multiplied by a figure reflecting the risk and growth prospects of the business. The most common approach for established, profitable, owner managed companies. The multiple is where sector, size, revenue quality and owner dependency all show up.
Projected future cash flows brought back to a present value. Suited to businesses with predictable, forecastable cash generation, and to situations where the future looks materially different from the past. Highly sensitive to the assumptions used, which is both its strength and its weakness.
The net value of the assets, adjusted to reflect what they would realise. Appropriate where the assets carry the value rather than the trading activity, such as property holding companies, or where a business is being wound down rather than sold as a going concern.
What similar businesses in the same sector have actually changed hands for. Useful as a sense check, limited by the fact that private company transaction data is patchy and rarely tells you how the deal was structured.
What it would cost a buyer to build the same business from scratch, including the time and losses involved. Rarely the primary method, but it sets a useful ceiling in some negotiations.
This is the part a quick estimate skips. Applying two legitimate business valuation methods to the same business will produce two different figures, and neither is wrong.
Which one is appropriate depends on the nature of the business, the reason for the valuation and who will rely on it. A figure prepared for a negotiation is constructed differently from one prepared for a tax position or a dispute between shareholders. Where more than one method applies, the valuer has to decide how much weight to give each, and be able to justify that decision.
That judgement is the work. It is also why a figure that cannot be explained line by line is of limited use once someone starts asking questions. If you want that figure prepared properly, our business valuation page sets out what is involved.
You can produce a working estimate, and it is worth doing. Take your adjusted profit, apply a range of multiples you believe reflects your sector, and you have a starting point. That is what a business valuation calculator does, and for planning purposes it is often enough.
What you cannot easily do yourself is assess your own risk objectively. Owners consistently underestimate how dependent the business is on them, because the dependency is invisible from the inside. You also cannot benchmark against transactions you have no access to, and you cannot easily separate what the business earns from what you earn.
An estimate you produce yourself is useful for planning. It is not useful in a negotiation, because the other side will ask how you arrived at it. If you want to see how improvements in your underlying drivers change the figure, our business growth calculator models it.
A business valuation carried out at the point of sale tells you what you are going to get. One carried out years earlier tells you what to change.
That is the entire argument for doing it early. The factors that hold a figure down, owner dependency, customer concentration, unreliable reporting, weak documentation, all take a run of trading history to fix. Discovering them when a buyer raises them leaves you no time to act.
If you want a quick read on where your business currently stands against those factors, the Exit Readiness Scorecard works through the areas a buyer would examine and shows you which are weakest.
How do you value a business?
You value a business by establishing its sustainable earnings, adjusting them to reflect what a new owner would inherit, assessing the risk that those earnings continue, and applying a valuation method suited to the business and the purpose of the figure. For most owner managed companies that means a multiple of adjusted profit, with the multiple reflecting how certain the earnings look to a buyer.
How much is my business worth?
It depends on your adjusted profit and on how risky a buyer considers those earnings to be. Two businesses with identical profit can be worth very different amounts, because value is driven by the likelihood of that profit continuing without the current owner. A rough estimate can be produced from your own figures, but the risk assessment is the part that moves the number.
Can I value my business using a business valuation calculator?
A calculator is a good starting point and a poor finishing point. A well built one takes your adjusted figures and shows you a sensible range, which is genuinely useful for planning and for framing a conversation. What no calculator can do is assess how dependent the business is on you, how durable your customer relationships are or how a buyer would view the quality of your records, and those are the factors that separate two businesses reporting the same profit. Use one to orient yourself, then have the figure prepared properly before you rely on it.
What is the difference between a valuation and a sale price?
A valuation is a reasoned view of what a business is worth on a stated basis. A sale price is what one specific buyer agrees to pay after negotiation, influenced by how many buyers are interested, what that buyer expects to gain and how the deal is structured. A sound valuation tells you when an offer is worth taking seriously.
When should I value my business?
Long before you intend to sell, and then periodically. A valuation prepared at the point of sale tells you the outcome. One prepared years earlier tells you which factors are holding the figure down while there is still time to act on them.
Does the type of business affect which method is used?
Yes, considerably. Trading businesses with steady profits are usually valued on an earnings multiple. Asset heavy businesses may be valued on their net assets. Businesses whose future looks materially different from their past may warrant a cash flow based approach. Choosing between them is a matter of judgement rather than a rule.