Guide
Business valuation methods: which one a UK buyer will use
Updated
Four methods get taught. One of them decides most UK SME sale prices. Knowing which is which stops you preparing the wrong evidence.
The four methods, and what each is for
- Earnings multiple (EBITDA or P/E)
- Normalised earnings multiplied by a market multiple. This is how nearly every UK SME trade sale is settled, which is why the UK200Group index reports its results in this form. It needs a defensible earnings figure more than it needs a clever multiple.
- Discounted cash flow
- Forecast free cash flows discounted at a required rate of return. Right in principle, unstable in practice for a small company: a percentage point on the discount rate or a year on the forecast moves the answer more than anything you can negotiate. Used for infrastructure, long contracts and disputes, rarely to settle an SME price.
- Asset basis (net asset value)
- Assets less liabilities, restated to current values. It is the floor, not the price, for a trading business, and the right method for property-holding and investment companies or a business being wound up.
- Entry cost
- What it would cost the buyer to build the same thing: recruit the team, win the customers, buy the kit. A sanity check and a negotiating argument, not a market price.
Why the earnings figure matters more than the multiple
A 0.5x argument on the multiple is a visible fight. The quieter one is over the earnings the multiple is applied to. Buyers normalise: they add back genuine one-offs, restate owner pay to a market salary for the role, restate related-party rent, strip out income that will not recur, and charge for costs the seller has not been paying, such as a proper replacement for the owner. On a 4.5x multiple, £40,000 of disputed add-backs is £180,000 of price.
What HMRC does with the same question
If the sale is between connected parties, or shares are being valued for tax rather than sold at arm's length, HMRC's Shares and Assets Valuation team applies the statutory open market hypothesis rather than a broker's rule of thumb, and the case law it works from is set out in its own manual (HMRC Shares and Assets Valuation Manual, SVM113000). A price agreed with a real third-party buyer is much stronger evidence than any model.
Use the calculator for the earnings-multiple method, which is the one a UK trade buyer will actually open the conversation with.