What is my business worth? How buyers really value a business

Almost every owner has a figure in mind. It might come from years of hard work, from what a competitor sold for, or from what you'll need to retire comfortably. All of those are understandable. None of them is how a buyer thinks.

Buyers value a business on its future earnings and the risk of achieving them. This article explains how that works in practice, what pushes value up or down, and how to get an accurate view of what your business is worth.

Value is about future earnings, adjusted for risk

When someone buys your business, they're buying a future stream of profits. They aren't paying for the hours you've put in, or for what the assets cost you.

Every buyer is really asking two questions:

1. How much will this business earn?
2. How confident can I be that it will?

The second question matters as much as the first. Lower risk means a higher price for the same level of earnings.

Start with the right earnings figure

Most valuations of established businesses start with EBITDA: earnings before interest, tax, depreciation and amortisation. Put simply, it's the profit the business makes from its operations, before financing and accounting decisions.

Buyers then look at normalised earnings, which adjust EBITDA for things that won't continue under a new owner. Common adjustments, or add-backs, include:

• the owner's salary, adjusted to what it would cost to employ someone in the role;
• one-off costs, such as a legal dispute or a relocation;
• personal expenses that have run through the business.

Every add-back needs evidence. A buyer will test each one in due diligence, and an add-back that can't be supported will come straight off the price.

Consistency matters too. Three years of steady, verifiable trading is worth far more than one strong year, because it shows the earnings are sustainable.

The common valuation methods

• Earnings multiple. The most common method for established small and medium businesses. Normalised earnings are multiplied by a figure that reflects the business's risk and growth.
• Asset-based valuation. Relevant for asset-heavy businesses, or those whose earnings are weak.
• Comparable transactions. What similar businesses have actually sold for. Recent deal data matters, because markets move.
• Discounted cash flow. Used for larger or high-growth businesses, where future cash flows are forecast and discounted back to today.

In practice, a sound valuation draws on more than one of these.

What drives the multiple up or down

Two businesses with the same profit can sell for very different prices. The difference is almost always risk.

What increases value

• A diversified customer base
• Recurring or contracted revenue
• Documented systems and processes
• A capable team, and a business that runs without the owner
• Consistent growth
• A strong market position

What reduces value

• Customer concentration
• Dependence on the owner
• Inconsistent earnings
• Poor records
• Short or unassignable leases
• Key staff risk
• Deferred investment

Imagine two businesses, each making the same profit. The first depends on its founder for every major customer relationship and has one client making up a large share of revenue. The second has a management team that runs the day to day and revenue spread across many customers. A buyer will pay more for the second, because there's less that can go wrong after settlement.

Why buyers pay different prices

• Trade buyers may pay more for synergies or strategic fit.
• Financial buyers focus on returns and risk.
• Individual buyers are often limited by the funding they can raise.

A competitive, well-run process helps uncover the buyer who will pay the most.

Deal structure affects the real price

The headline price isn't always what you receive. Earn-outs, vendor finance, working capital adjustments and stock values all change the final figure. A lower headline price on better terms can be the better offer.

Common mistakes owners make

• Pricing on emotion, effort or retirement needs.
• Relying on rules of thumb, or on what a friend's business sold for.
• Overstating add-backs.
• Going to market before the business is ready.
• Overpricing, which leads to a stale campaign and a weaker negotiating position.

How to increase value before you sell

Much of what drives value is within your control, but it takes time. Start preparing two to three years before you plan to exit.

• Reduce owner dependence and delegate key relationships.
• Broaden the customer base and secure contracts.
• Clean up the financials and document your systems.
• Secure lease terms and retain key staff.

Getting an accurate valuation

An independent, evidence-based appraisal grounded in real transaction data is worth far more than a rule of thumb. To get one, have these ready:

• three years of financial statements;
• current management accounts;
• customer and staff details;
• your lease terms.

A confidential appraisal can guide your timing and preparation, as well as the price.

The bottom line

Value is earned through lower risk and reliable earnings, and much of it is within your control. If you'd like to know what your business is worth today, and what would increase it, I'm happy to have a confidential, no-obligation conversation.