If you're trying to understand how to value a business or determine how much your company is worth, you’re not alone. Every year, thousands of UK business owners seek a reliable business valuation for exit and succession planning, raising finance and securing investment in the business, attracting investors, arriving at a fair price for employees wishing to buy or sell shares in the company, strategic planning and many other reasons.
This comprehensive guide explains the most accurate and widely used business valuation methods, when to use them, and how to choose the right approach for your industry and business model.
What Is a Business Valuation?
A business valuation is an assessment of the financial worth of a company based on its assets, earnings, cash flow, market position and future potential. Understanding the value of your business is essential when:
There is no single formula for company valuation. Instead, experts use multiple valuation methods to produce a realistic and market-aligned figure.
Core business valuation methods:
Working with an independent valuation expert ensures accuracy and credibility.
Why an Accurate Business Valuation Matters
Understanding how much your business is worth gives you a clear financial picture and supports better decision-making.
How to Calculate What Your Business Is Worth
Below are the four primary recognised business valuation methods used across the UK, each offering unique insights.
EBITDA Earnings Multiples and Fee Income Revenue Multiples
In most cases for small trading businesses, a capitalisation of earnings may provide the most accurate market comparison. To do this, initially, a fair level of maintainable earnings needs to be established from the surplus - an adjusted level of EBITDA (earnings before interest, tax, depreciation and amortisation). This level of sustainable earnings is then multiplied by a business category related multiple (service, retail, manufacturing and so on). All figures are then verified with a comparative value based on the open market transaction values of closely comparable businesses using Comparable Company Analysis.
In certain industries, a multiple of recurring fee income - or annual revenue or turnover - may be appropriate to represent market value, for example where repeat income streams are consistent or contracted, predictable and stable (such as a subscription business model with long-term service contracts). A revenue based assessment can also be used as a sense check against an EBITDA or discounted cash flow (DCF) valuation, although - as the revenue multiple approach ignores efficiency, margins, and capital intensity - for most sectors it is considered less accurate than an EBITDA earnings multiple approach.
Net Asset Valuation
Another way to value a small business is through a net asset valuation. This method is often appropriate for strong, stable businesses with plenty of physical assets - property and manufacturing businesses are good examples, and it can also be relevant for liquidation scenarios. Asset valuation can result in the lowest assessment of a business and, for small trading businesses, a net asset approach may not represent fair market value.
Discounted Cash Flow (DCF)
The DCF method estimates the present value of your business by forecasting future cash flows and applying a discount rate that adjusts for risk and the time value of money.
Although more typically used for investment into larger organisations or significant asset acquisition, a DCF methodology can be appropriate for valuations in connection with growth shares and freezer shares - especially for established businesses with predictable cash flows, such as energy companies.
To establish the value of a small business through discounted cash flow, the valuer will estimate today's value of future cash flows. The assessment considers risk and the time value of cash. In short, time value is based around today's pound having more value than tomorrow's, owing to its earning potential. The discount interest rate tends to vary between 5 and 25 percent, though each assessment is reviewed on a unique basis.
Specific Industry Methodology
In some industry sectors – such as where there are high volumes of business acquisition and disposal - buying and selling businesses is commonplace, which can lead to industry-wide rules of thumb that may be dependent on factors that reflect real-world market demand and acquisition premiums.
We are happy to explain the process and what you would need to provide, so why not phone the office on 01425 402 402.
An expert business valuation supported by a professionally prepared Valuation Report from an independent and authoritative source is an essential aid for:
Valuation Reports produced by R A Valuation Services Ltd are bespoke and geared to each client’s individual circumstances and requirements; they are definitive and realistic in the market place. As we are recognised as expert witnesses for supplying Valuation Reports to UK courts and HMRC queries/challenges, we are acknowledged to be the authoritative business valuer by:
R A Valuation Services' Valuation Reports are tailor-made for their purposes, definitive and realistic in the market place. Indeed, such is their authority that an R A Valuation Services' Valuation Report is normally insisted upon in support of negotiations.