How to value a business you want to buy (UK buyer's guide)

Most guides to valuing a business are written for sellers. They tell an owner how to get the highest number. This one is written for the other side of the table: you, the buyer, deciding what a business is worth to you and what you should actually pay.

The short version is simple. You are buying a stream of future profit, and you are paying today for it. Everything below is about working out how much profit is real, how much it is worth, and how to turn that into a price you will not regret.

What are you actually buying?

You are not buying last year's accounts, and you are not buying the asking price. You are buying the profit the business will keep making once the current owner has left and you are running it. That is the number that pays back your debt, your investors and your time.

So the first job is to forget the seller's figure for a while. Rebuild the profit yourself from the accounts, the management accounts and the questions you ask. Then decide what that profit is worth.

What are maintainable earnings, and what adjustments do buyers make?

Maintainable earnings are the profit you expect the business to make, year after year, under normal conditions. For most UK small and mid-sized businesses, buyers use EBITDA: earnings before interest, tax, depreciation and amortisation. It is a rough measure of the cash the business produces before financing and tax.

Sellers usually present an "adjusted" EBITDA. Some adjustments are fair. Others are wishful. These are the ones we look at hardest:

• The owner's pay. Many owners pay themselves a small salary plus dividends. You will need to pay someone a proper market salary to do their job, so deduct the difference.
• Related-party rent. If the owner owns the building and charges the company a low rent, you will pay market rent after completion. Adjust for it.
• Genuine one-offs. A legal dispute, a one-time restructuring cost or a flood can be added back, but only with evidence that it really will not happen again.
• Family on the payroll. A spouse paid but not working can be added back. One who does real work needs replacing, so the cost stays.
• Lost or shrinking customers. If a customer has left or cut its orders, take its profit out, even if the seller has not.
• "Add-backs" to challenge. Marketing that "did not work", a "one-off" bad debt that happens every year, or under-spending on maintenance before a sale. Ask for three years of figures. If it happens most years, it is a normal cost.

The aim is not to squeeze the seller. It is to get to a number you believe. A seller will often agree to your figure if you show your working line by line.

Which valuation method fits the business?

There is no single correct method. Each one suits a different kind of business, and good buyers usually use one main method and one as a check.

In our experience, SDE is mostly used for very small businesses, roughly those making under £250k to £300k, where the new owner steps straight into the old owner's role. Above that, use EBITDA with a proper salary for the person running it.

Revenue multiples belong to a narrow group of businesses. On a European software acquisition I worked on, the price was set at 5.2x annual recurring revenue of £7.4m. That multiple was only defendable because gross retention was 94%. Without that kind of evidence, do not pay on revenue.

What multiples do UK SMEs sell for?

Multiples depend heavily on size. Smaller businesses sell for lower multiples because they carry more risk: more reliance on the owner, fewer customers, thinner management. Here is what current UK data shows.

Price Bailey notes that sub-£5m multiples were "consistently below 5x" over the last 12 months, and that values vary widely within each sector.

Two other reference points help:

• BDO's Private Company Price Index (PCPI) put trade buyers at 9.4x EV/EBITDA in Q1 2024, against 11.5x for private equity deals and 11.9x for the FTSE All-Share (BDO, May 2024). These are larger deals than most SME purchases.
• Dealsuite data for 2022, reported by UHY Hacker Young in March 2023, showed about 4.3x for businesses with c.£500k EBITDA and 6.3x at £2m EBITDA, with some sectors such as construction and wholesale below 3x. This is older data, but it shows the same pattern: size and sector drive the multiple.

Treat these as a starting point, not an answer. A business with a strong second tier of managers and no customer over 10% of sales can sit above the median. One where the owner holds every key relationship should sit below it.

How do you get from enterprise value to the price you pay?

This is the step many first-time buyers miss, and it can move the price a lot. A multiple of EBITDA gives you enterprise value (EV): the value of the business as if it had no debt, a normal amount of cash and a normal level of working capital. What you actually pay the seller for the shares is the equity value.

To get from one to the other:

1. Deduct debt. Bank loans, asset finance, overdrafts, director loans owed back to the owner.
2. Deduct debt-like items. Unpaid corporation tax, deferred VAT, overdue supplier bills, unfunded holiday pay, big repairs the seller has put off.
3. Add surplus cash. Only cash above what the business needs to trade day to day. The cash in the bank on a quiet month-end is not all surplus.
4. Adjust for working capital. Agree a "peg": the normal level of stock, debtors and creditors, usually an average over the last 12 months. If working capital at completion is below the peg, the price falls by the difference. If it is above, the price rises.

The peg matters because a seller can push cash out of a business before a sale: chase debtors hard, delay paying suppliers, run stock down. Without a peg, you pay for that cash twice. In our experience, debt-like items and the working capital adjustment often move the final price more than the argument over the multiple does.

Worked example: valuing a £5m-revenue UK business

This is a worked example. The business and numbers are made up to show the method.

Fernside Components Ltd is a fictional UK manufacturer with £5.0m revenue and £600k reported EBITDA. The owner is retiring. His broker presents "adjusted EBITDA" of £700k and asks £4.2m (6x).

Step 1: rebuild maintainable EBITDA

Step 2: apply a multiple. At £530k EBITDA, this business sits in the under-£5m band, where the recent median is about 4.6x to 5.0x. Fernside has a solid works manager but two customers make up 35% of sales, so we use a range of 4.5x to 5.5x, with 5.0x as the central case.

• EV at 4.5x: £2.39m
• EV at 5.0x: £2.65m
• EV at 5.5x: £2.92m

Step 3: from EV to equity value (central case)

You would also pay stamp duty at 0.5% on the shares, about £11k, plus your own legal, financial and tax due diligence costs.

Step 4: structure changes what you really pay. The seller wanted £4.2m. You are at £2.17m. Structure is how you close part of that gap without taking on his risk:

• Cash at completion: £1.60m. What you need to fund on day one.
• Deferred consideration: £300k at 12 months. Fixed, but you keep the cash for a year and can set off any warranty claims.
• Vendor loan: £270k over three years with interest. The seller lends you part of the price. It shows he believes in the business.
• Earn-out: up to £500k, paid only if EBITDA reaches £700k in year two. If his £700k figure is right, he gets paid for it. If it is not, you do not pay for profit that never arrived.

The headline could be "up to £2.67m", which helps the seller save face. Your fixed price stays at £2.17m, and £1.60m of it is paid on day one. The same business can be a good deal or a bad one depending on how the price is paid.

How do you avoid overpaying?

Most overpayment is not a maths error. It comes from falling in love with a deal. These checks help:

1. Rebuild EBITDA yourself. Never start from the seller's adjusted figure.
2. Price the risks you can see. Customer concentration, owner dependence, old equipment, key staff without contracts. Each one should push the multiple down.
3. Agree a working capital peg in the heads of terms, not at the end when you are tired and committed.
4. List every debt-like item before you agree a price, and ask for them in writing.
5. Pay for proof with structure. If the seller insists on a higher number, link the extra to an earn-out based on results.
6. Check what you can fund and repay. If the debt cannot be repaid from maintainable EBITDA within a sensible period, the price is too high, whatever the multiple says.
7. Set a walk-away price before you negotiate, and tell someone who will hold you to it.

Due diligence is where you test all of this. Our due diligence checklist covers what to ask for and when.

When should you get help?

You can value a small business yourself with this method and a good accountant. Get help when the deal is large relative to your balance sheet, when the seller has an adviser and you do not, or when the structure (earn-outs, vendor loans, the peg) is doing a lot of the work.

A buy-side adviser works only for you. We do not act for sellers. If you want to know what that looks like in practice, read what a buy-side M&A adviser does. If you are planning your first deal, it also helps to know how long an acquisition takes in the UK, because valuation and diligence take most of that time.

If you want to build these skills over a structured three months, the Acquisition Accelerator covers valuation, approaches and deal structure for a small group of owners. To keep learning for free, join the Acquirers Club for a weekly email and a monthly report on UK deal activity.