How the number is built
Start with reported profit. Adjust it for owner remuneration above a market salary, one-off costs, non-trading items and personal expenses run through the company. That gives adjusted EBITDA: what the business would earn in a buyer's hands. Apply a multiple to that figure and you have an enterprise value. Adjust for cash, debt and working capital and you have the equity value, which is what is actually paid for the shares.
The adjustments matter as much as the multiple. A £150,000 adjustment at a multiple of five is worth £750,000 of enterprise value, which is why every adjustment needs evidence before it is claimed and will be tested during due diligence.
What moves the multiple
- Size. Larger earnings attract more buyers and a higher multiple, other things being equal.
- Revenue quality. Contracted and recurring income is valued above project revenue of the same size.
- Customer concentration. Dependence on a few clients reduces the multiple or shifts consideration into an earn-out.
- Management depth. A business that runs without the owner is worth more than one that does not.
- Growth and margin. Demonstrated, sustainable growth supports a premium; growth promised in a forecast rarely does.
- Buyer fit. A buyer who gains something specific from the acquisition can pay above the market range and still be rational.
Had a number put to you by a buyer?
We will tell you confidentially whether it is a fair reflection of the business and what sits behind it.
Enterprise value, equity value and what you receive
Most offers are made on a cash-free, debt-free basis. Surplus cash is added, debt and debt-like items are deducted, and the business is expected to be handed over with a normal level of working capital. Two offers at the same headline value can differ materially once the working capital target, the treatment of finance leases and any deferred consideration are taken into account.
Structure matters as much as price. Cash at completion, deferred payments, earn-outs and rollover equity each carry a different level of certainty. The sell-side process covers how these are negotiated and where the risk sits.
Valuation in a partial sale
Selling a stake introduces further questions: whether a minority holding is discounted, how the remaining equity is valued at a second exit, and what governance rights come with the shares you keep. Valuation reality in partial sales deals with that in detail, and partial business sales covers the structures.
Common questions
How are UK owner-managed businesses valued?
Most are valued on a multiple of adjusted EBITDA, with the multiple reflecting size, growth, revenue quality, management depth and sector. The multiple produces an enterprise value. Cash, debt and a normal level of working capital are then adjusted to arrive at the equity value paid for the shares.
What is the difference between enterprise value and equity value?
Enterprise value is the value of the trading business, independent of how it is financed. Equity value is what shareholders receive: enterprise value plus surplus cash, less debt and debt-like items, adjusted for any shortfall or excess against normal working capital. Two offers with the same headline enterprise value can deliver very different amounts to you.
Does the cash in my company get added to the price?
Usually yes, on a cash-free, debt-free basis, but only the cash that is genuinely surplus. The business must be handed over with enough working capital to keep trading normally, and buyers define that level carefully. Disputes over the working capital target are among the most common late-stage negotiations.
Is debt deducted from the sale price?
Yes, along with items a buyer treats as debt-like: overdrafts, invoice finance, hire purchase and finance leases, unpaid tax, deferred consideration on earlier acquisitions and in some cases dilapidations or pension deficits.
What does a valuation not tell you?
What a specific buyer will pay. A valuation sets a defensible range. The price achieved depends on who is approached, what the acquisition does for them and whether they are competing with anyone else for it.