After finding the right target business, a business valuation is the first stage in starting the negotiation process on the final purchase price.
There are many valuation methodologies, but for the SME market – and, more specifically, for businesses with EBITDA (earnings before interest, tax, depreciation and amortisation) of less than £1m – the “multiple of EBITDA” method is usually the most relevant.
The range of multiples applied is typically, though not exclusively, between 3x and 6x.
In practice, this means the business is valued by taking its annual profit – adjusted to remove the current owner’s discretionary spending and personal items that a new owner would not be expected to incur – and then applying an agreed multiple to that adjusted profit to arrive at an overall valuation figure.
The actual multiple applied is influenced by several factors, including:
Formal contracts with customers and suppliers, and their duration~
Retention of equity by an existing owner when the sale is completed
Patents and intellectual property (IP)
Defensible products, technology or market position (i.e. high barriers to entry)
Formal employment contracts for staff
Strong internal systems and processes
Robust financial management procedures and cash flow forecasting
Retention of key second‑tier management
The sector – some sectors, particularly tech and especially fintech, attract higher multiples
Once you have a valuation, you will usually want to explore it with the vendors’ advisers to understand whether it is in the right “ballpark” for their client.
If it is broadly acceptable, you can then work up the detailed structure of your offer. This is covered in a separate section of the Valius knowledge library.
These items include pension payments; additional salaries for family members not likely to be retained post‑sale; personal healthcare; and any other personal or one‑off costs.
There is no single “right” way to value a business.
Many business valuations use a matrix model which “normalises” unusually high or low profit years and looks at the general run of trade over a longer period, rather than relying solely on the prior year’s results.
If the last year was particularly strong, valuing purely off that figure can inflate the valuation, which is unlikely to suit a buyer.
There is a strong chance that the sellers will not agree with your valuation method or your final value figure. This is entirely normal.
The seller’s advisers will likely have their own methodology, and the seller may have a specific number in mind, influenced by those discussions.
From this point, it becomes a negotiation process aimed at finding a position that both parties can accept.
Ultimately, a deal only happens when you reach the point of a willing seller and a willing buyer.