How buyers value a business, in plain English

Valuation is the question every owner asks first and understands last. Not because owners are not smart. Because the people who explain it usually have a reason to confuse you.

Brokers inflate valuations to win your business. Advisers wrap simple ideas in language that needs a law degree. Friends at the golf club quote numbers from deals that were nothing like yours.

This guide explains how buyers like us actually think about value. It will not give you a precise number. Nothing on paper can. But by the end you will understand how the number gets built, what makes it go up or down, and how to spot a valuation that is designed to flatter rather than inform.

This guide is for owners of established UK businesses, whether the business is thriving or going through a hard patch. It applies whatever your reason for selling. Retirement, a change of direction, ill health, or a business under pressure.

A business is worth what someone will pay for it. That is the whole answer.

Everything else in this guide is about estimating what a sensible buyer would pay. But no formula, report or online calculator overrides that basic fact. A valuation is an opinion. An offer is a fact.

This matters because owners often anchor to a number from a broker report or an online tool, then feel insulted by real offers. The report was never money. The offer is.

Owners talk turnover. Buyers talk profit.

A business turning over £2 million with £100,000 of profit is worth far less than a business turning over £800,000 with £250,000 of profit. Turnover tells a buyer how big the machine is. Profit tells them what the machine produces.

If you remember one thing from this guide, make it this. The value of your business is built on the profit it reliably makes, not the money that passes through it.

Here is some good news. The profit figure in your statutory accounts is usually not the figure a buyer uses. Buyers work from adjusted profit, sometimes called normalised profit or adjusted EBITDA.

EBITDA sounds technical. It just means earnings before interest, tax, depreciation and amortisation. In plain terms, the cash profit the trading business generates before financing choices and accounting adjustments.

Adjusted means we then correct for things that would not carry on under a new owner. These corrections are called add backs. Common ones:

• A salary you pay yourself above or below the market rate for the job you do
• Family members on the payroll who do not work in the business
• Personal costs run through the company. Vehicles, travel, subscriptions
• One off costs that will not repeat. A legal dispute, a flood, a bad debt
• Rent, if you own the property personally and charge the company above or below market rate

Most owner managed businesses have meaningful add backs. It is common for adjusted profit to be noticeably higher than the profit in the accounts. This is one place where honest preparation genuinely increases your value.

A warning in the other direction. Buyers also adjust downwards. If you pay yourself £20,000 for a job that would cost £80,000 to replace, a buyer will deduct the difference. If a one off windfall boosted last year, it comes out.

Once a buyer has your adjusted profit, they apply a multiple. Adjusted profit times the multiple gives the headline value of the trading business.

For established owner managed UK businesses, multiples typically sit somewhere between two and five times adjusted profit. Larger businesses with strong recurring revenue can go higher. Smaller businesses that depend heavily on the owner often sit lower. Treat any precise figure you read online with suspicion. The range is real. Your position within it is the whole game.

What pushes a multiple up:

• Recurring or contracted revenue. Customers who pay every month without being resold
• A spread of customers. No single customer providing a dangerous share of turnover
• A business that runs without you. A capable second tier of management, documented processes
• Clean, current, believable financial records
• Steady or growing profit over several years, not one good year

What pushes a multiple down:

• The business is you. Customers deal with you, quotes come from your head, staff wait for your decisions
• One or two customers dominate the revenue
• Declining profits or erratic swings year to year
• Messy books, late accounts, unexplained numbers
• Contracts, leases or licences that die or change on a sale

A multiple is really a price on certainty. The more confident a buyer can be that the profit continues after you leave, the more of it they will pay for.

Headline valuations are usually on a cash free, debt free basis. Plain English translation. The price assumes you keep the surplus cash and you settle the debts.

So a £1 million valuation does not mean £1 million in your pocket. If the business owes £200,000, that typically comes off. If it holds £100,000 of genuinely surplus cash, that can come back to you. The business also needs to be handed over with enough working capital to trade normally. A buyer will not pay full price for a business that needs immediate refuelling.

None of this is sharp practice. It is standard. But owners who do not know it feel ambushed when it appears in an offer. Now you know.

Plenty of good businesses hit hard times. A big customer leaves. Costs spike. Illness takes the owner out for a year. If that is you, valuation works differently, but a sale is still possible and often the right move.

A struggling business is usually valued on some combination of its assets, its order book, its people and its potential in stronger hands, rather than a multiple of profit that is not there. The number will be lower than you hoped. Be ready for that. But the alternative to a modest sale is often a slow decline that ends with nothing, plus months of stress you did not need.

The right buyer for a troubled business is an operator who can stabilise it, not a bargain hunter who strips it. Judge buyers on their plan for your staff and customers, not just the figure on the page.

Two offers of £1 million can be completely different deals.

Offer one. £1 million, all paid on completion.

Offer two. £1 million as £400,000 on completion, £300,000 over three years, and £300,000 only if the business hits targets you no longer control.

Most offers for owner managed businesses involve some structure. Common elements, in plain terms:

• Deferred consideration. Part of the price paid over an agreed period after completion
• Seller financing. You effectively lend the buyer part of the price, repaid on agreed terms. Very common in direct sales, and it usually gets you a better total price than an all cash buyer would offer
• Earn out. Part of the price depends on future performance. Fine if the targets are clear and fair. Dangerous if they are vague or depend on decisions the buyer makes after you leave

Structure is not a trick. It is how most of these deals get done, and it often serves the seller well. But you must compare offers on their full shape, not their headline. When you get an offer, ask three questions. How much on day one. How certain is the rest. What has to happen for me to receive it.

And our standing rule applies. If you need a dictionary to read the offer, it is a bad offer.

Meet a fictional engineering business in the North of England. Turnover £1.8 million. Profit in the accounts £190,000.

The business has decent spread across thirty customers and a good workshop manager, but the owner still does all the quoting. A buyer lands on a multiple of three. Headline value around £834,000, cash free and debt free.

The offer arrives as £450,000 on completion and the balance paid over four years under a seller financing arrangement. Total £834,000. The owner compares that with a broker's report from two years earlier promising £1.5 million, feels deflated, then reads the broker's small print and realises the report used turnover multiples from software company sales.

The offer was real. The report was marketing.

Many brokers win clients by quoting the biggest number in the room, then charge fees whether or not the business sells at anything like it. Some are honest. The incentive structure is not.

Test any valuation you are given with three questions. What profit figure is it built on, and can I see the adjustments. What multiple has been used, and what recent sales of businesses like mine justify it. And is the person giving me this number paid regardless of whether it turns out to be true.

Even if selling is two or three years away, a handful of changes move real money:

1. Reduce the business's dependence on you. Delegate the quoting. Introduce customers to your second in command. Every task only you can do is a discount on your price
2. Get the books clean and current. Accounts filed on time, management figures monthly, add backs documented as you go
3. Spread the customer base. If one customer is more than a quarter of turnover, that concentration is costing you
4. Lock in what can be locked in. Contracts with key customers, terms with key staff, a lease with sensible remaining length
5. Show a trend, not a spike. Buyers pay for steady. Three solid years beat one spectacular one

This guide is general information, not financial, legal or tax advice. Every business and every sale is different. Take advice from your accountant and solicitor before acting on anything here. Exit Ready UK Ltd, company number 17310523, registered in England and Wales.