Almost every owner who thinks about selling starts with the same question: what is my business worth? It feels like it should have a single, knowable answer, the way a house has an asking price or a car has a book value. It does not. A business valuation is a range, built from a chosen method, the quality of the earnings underneath it, and a judgement about risk and growth that two competent people will read differently. The number you end up agreeing is settled in negotiation, not on a spreadsheet.
This guide explains how UK businesses are actually valued in 2026/27. It covers the four methods that do the real work (earnings multiples, seller's discretionary earnings, asset-based valuation and discounted cash flow), the sector multiple ranges that decide where your business sits, how add-backs normalise your profit, and why the headline valuation and the cash you keep after tax are two very different figures. It is written for owner-directors planning an exit, not for consumers, and it is the methods hub for our seven sector-specific guides and our business valuation calculator.
Why a valuation is a range, not a number
The first thing to unlearn is the idea of a single correct value. A trading business is worth what a willing buyer will pay a willing seller, and that depends on who the buyer is, how many of them there are, and what they see when they look under the bonnet. A strategic buyer removing a competitor and gaining your customers can justify a far higher figure than a financial buyer applying a standard multiple. A single interested party with no competition will pay less than three parties bidding against each other.
So a proper valuation gives you a defensible range: a low end that reflects a conservative, single-buyer, high-risk view, and a high end that reflects a competitive process and a business that has been de-risked and presented well. Anyone who hands you one precise number is either guessing or selling you something. Your job, and your adviser's, is to understand where in the range your business genuinely sits, and then to run a process that pushes the outcome towards the top of it.
Two forces set the range. The first is the quality and sustainability of your earnings, which we normalise through add-backs. The second is the multiple those earnings attract, which is driven by your sector, size, growth and risk. Get both right and you have a number you can defend across a negotiating table. The rest of this guide works through each method, then the multiples, then the adjustments that connect them.
Earnings multiples: the EBITDA method
For most established SMEs, valuation starts with an earnings multiple, and the earnings measure of choice is EBITDA: earnings before interest, tax, depreciation and amortisation. EBITDA strips out how the business is financed, its tax position and its accounting policies for depreciation, leaving a cleaner picture of underlying trading performance that can be compared like for like across companies and against the prices other businesses have sold for.
The method is simple in form. You take adjusted EBITDA, apply a multiple, and you have an enterprise value. The multiple is where the judgement lives. A business with recurring revenue, a strong management team, diversified customers and a track record of growth sits at the top of its sector range. A business that depends on the owner, has one big customer, and grows in fits and starts sits at the bottom. As broad UK ranges, established SME trade sales tend to land between 4 and 6 times adjusted EBITDA, with lower-margin or project-based sectors sitting below that and high-growth or recurring-revenue businesses above it.
Worked example. A business reports net profit of £380,000. You add back the owner's salary of £150,000 (a replacement manager would cost £70,000, so £80,000 is an add-back), £25,000 of one-off legal costs, and £15,000 of personal expenses run through the company. Adjusted EBITDA is roughly £500,000. At a 4.5 times multiple that is an enterprise value of £2.25m; at 5.5 times it is £2.75m. Add £200,000 of surplus cash and subtract £150,000 of debt, and the equity value to the seller is a range of roughly £2.3m to £2.8m. The half-turn of multiple is worth £500,000, which is why the quality of the business, not just its profit, matters so much.
Seller's discretionary earnings: valuing owner-run businesses
EBITDA works well when a business runs largely without its owner. It works badly for small, owner-operated businesses where one person's salary, benefits and personal costs are woven all through the accounts and the owner is also the top salesperson, the operations manager and the face of the firm. For these, buyers use seller's discretionary earnings, or SDE.
SDE captures the total financial benefit the business gives a single working owner. You start with net profit and add back the owner's entire remuneration package (not just the excess over a market rate, as with EBITDA), plus one-off costs, non-business expenses, and any discretionary spending. The result is the pot of money a new owner-operator could reasonably expect to draw from the business by stepping into the same role.
Worked example. A one-owner business reports net profit of £60,000 after paying the owner a £45,000 salary. The owner also runs a £6,000 car and £4,000 of personal costs through the company. SDE is £60,000 plus £45,000 plus £6,000 plus £4,000, which is £115,000, the full benefit a working owner draws. At a 3 times SDE multiple that is an indicative value of around £345,000. Note what a passive EBITDA approach would have done: it would have added back only the excess of the owner's pay over a market rate, and for a business that genuinely needs a full-time owner there is little or no excess, so the EBITDA figure would understate the deal a buyer will actually do.
Small owner-run businesses typically sell on 2.5 to 4 times SDE, lower than an EBITDA multiple precisely because SDE includes the owner's own labour. The buyer is effectively buying themselves a job plus a return, so they will not pay a passive-investment multiple for it. The distinction matters: valuing a genuinely owner-dependent business on an EBITDA multiple usually overstates it, while valuing a management-run business on SDE understates it. Pick the measure that matches how the business actually operates, and be honest about how much of its success walks out of the door with you.
Asset-based valuation and the value floor
Some businesses are worth more for what they own than for what they earn. Asset-based valuation takes the market value of the assets (freehold property, plant and machinery, stock, debtors and investments) and subtracts the liabilities, to reach a net asset value. It suits property-heavy, capital-intensive and investment businesses, and it is essential for care homes, manufacturers with significant plant and freehold, and any business where the balance sheet dominates the profit and loss account.
Even for a profitable trading business, the net asset value acts as a floor. No informed buyer pays less than the recoverable value of the assets they are acquiring, because they could in principle buy the business, sell the assets, and be no worse off. Where a business makes little or no profit but holds valuable assets, the asset-based figure becomes the primary valuation rather than a floor. The trap is double counting: if plant, machinery or freehold property is being valued separately as an asset, make sure the earnings multiple you apply to the trade does not also assume the buyer gets those assets for free. Asset-heavy sectors often value the trade and the property separately for exactly this reason, and property in the mix brings its own tax questions, including SDLT and whether the premises sit in a pension scheme.
Discounted cash flow, and when it is actually used
Discounted cash flow (DCF) values a business on the present value of the cash it is forecast to generate in future, discounted back to today at a rate that reflects the risk of those cash flows arriving. In theory it is the most complete method, because it values the business on what it will produce rather than what it has produced. In practice it is used sparingly for owner-managed SMEs.
The reason is sensitivity. A DCF answer is only as good as its assumptions, and small changes in the forecast growth rate or the discount rate swing the result dramatically. For a mature business with steady, predictable earnings, a DCF and an earnings multiple usually land in a similar place, and the multiple is simpler and easier to defend. DCF earns its keep where the future genuinely differs from the past: a fast-growing company whose current profit understates its trajectory, a business with a long contracted order book, or an infrastructure-style asset with predictable long-run cash flows. For most SME trade sales, a buyer relies on the multiple and uses a DCF, if at all, as a cross-check rather than the headline.
Sector rules of thumb and multiple ranges
Every industry has its own conventions, and buyers in that industry price to them. Knowing your sector's basis and typical multiple is the single most useful anchor for setting expectations, because it tells you both what measure buyers value and roughly what they pay for it. The table below sets out the working ranges we use across our sector guides. Treat them as starting points: your position within the range is set by size, growth, recurring revenue, customer concentration and how much the business depends on you.
| Sector | Usual valuation basis | Typical multiple range | What lifts it |
|---|---|---|---|
| Recruitment | % of net fee income / gross profit, or EBITDA | ~4 to 6x EBITDA | Recurring temp/contractor book over one-off perm fees |
| Manufacturing | EBITDA plus separate asset backing | ~4 to 6x EBITDA | Plant, freehold and order book valued on top |
| Ecommerce | Multiple of SDE / adjusted net profit | ~2.5 to 4x SDE | Transferable platform accounts, brand and repeat customers |
| Construction | Net assets plus WIP, EBITDA for larger firms | ~2 to 4x EBITDA (lower, lumpy) | Framework contracts, low retentions, clean run-off |
| Law firm | Turnover/WIP plus goodwill (small), EBITDA (larger) | Varies with WIP and run-off cost | Recurring work, low PII run-off, clean client base |
| Accountancy | Multiple of gross recurring fees (GRF) | ~0.8 to 1.4x GRF | Sticky recurring fees, low attrition, strong systems |
| Care home | EBITDARM × yield, or per bed | Yield-driven / per-bed | CQC rating, occupancy and a favourable fee mix |
Each of these has a sector-specific diligence trap that can move the number as much as the multiple does. We cover them in full in the sector guides: selling a recruitment business, selling a manufacturing business, selling an ecommerce business, selling a construction business, selling a law firm, selling an accountancy practice and selling a care home. If your business does not appear here, the method still applies: find the measure buyers in your market actually use, and the range they pay against it.
What moves your multiple up or down
Two businesses in the same sector with the same profit can sell for very different multiples. The gap is risk and transferability, viewed through a buyer's eyes. A buyer pays more for earnings they believe will continue after you leave, and less for earnings that look fragile or tied to you personally.
- Owner dependence. If the business needs you to win work, keep clients or run operations, the buyer is buying risk. A capable management team that runs the business without you is the single biggest multiple-lifter for an owner-managed firm.
- Revenue quality. Recurring, contracted or subscription revenue is worth more than one-off project revenue, because it is predictable. Converting even part of your income to a recurring basis moves the multiple.
- Customer concentration. If one client is 40% of turnover, the buyer discounts heavily for the risk of losing it. A diversified customer base is worth a premium.
- Growth. A business with a credible, evidenced growth story attracts a higher multiple than a flat or declining one, because the buyer is pricing the future.
- Size. Larger businesses attract higher multiples than small ones in the same sector, because they are seen as more resilient and appeal to a wider pool of buyers, including private equity.
- Clean books and systems. Well-kept accounts, documented processes and defensible add-backs reduce the buyer's perceived risk and survive diligence, which protects the multiple you negotiate.
These levers are also the raw material of exit planning. Most of them take one to three years to move, which is why the highest-value work happens well before the business goes to market. Our guide to selling your business walks through the full journey, and our exit-planning content covers how to build the runway.
Controlling versus minority stakes
One more factor changes the number: how much of the business is being sold. The multiples and methods above assume the sale of a controlling interest, where the buyer gets the keys to the business and can run it as they choose. A minority stake is worth proportionately less per share, because the holder cannot control dividends, strategy or a future sale. Valuers apply a discount for lack of control, and a further discount for lack of marketability if the shares cannot easily be sold on. So a 20% shareholding is rarely worth a flat 20% of the whole-company value; it is usually worth less. This matters for share buybacks, bringing in an investor, buying out a departing shareholder, or gifting shares to family, where the value placed on the minority holding drives both the deal and the tax. If a minority valuation is being prepared for a tax purpose, it must follow HMRC's approach rather than a simple pro-rata split.
Adjustments and add-backs: normalising the earnings
Whichever multiple you use, it is applied to normalised earnings, not the raw figure in your accounts. Normalising means adjusting the reported profit to show the sustainable, transferable earnings a new owner would inherit. This is where a lot of value is made and lost, because every pound of genuine add-back is multiplied.
Common add-backs include the owner's remuneration above the cost of a replacement manager, pension contributions beyond a normal level, one-off costs (a legal dispute, a restructuring, a bad-debt write-off that will not recur), personal or family expenses run through the business, and rent paid to a connected landlord that differs from market rent. Each of these, added back, lifts adjusted earnings and therefore the valuation.
The discipline is evidence. Buyers scrutinise every add-back in due diligence, and anything that is not clearly non-recurring or genuinely non-business gets stripped out, with the price cut to match. An add-back you cannot support is worse than useless: it signals aggressive accounting and puts the buyer on guard about everything else. Prepare the schedule of adjustments as if a sceptical accountant will test each line, because one will. Clean, well-evidenced normalisation is one of the cheapest ways to protect your valuation.
Valuation versus price: what a buyer actually pays
A valuation is an estimate of what a business should be worth. The price is what a specific buyer agrees to pay, and it is shaped by forces the valuation cannot capture. The most important is competition: a well-run process with several interested buyers pushes the price towards, and sometimes beyond, the top of the range, while a single unadvised buyer will anchor low and hold there.
Deal structure matters as much as the headline. A £3m offer that is all cash on completion is worth more than a £3.5m offer where £1.5m is deferred over three years, or tied to an earn-out that depends on future performance you may no longer control. Warranties, indemnities and retentions all sit between the headline number and the cash in your account. This is why the number on the front page of an offer letter is only the start of the conversation, and why the tax treatment of each element (cash, deferred consideration, loan notes, earn-out) needs to be modelled before you agree the shape of the deal.
The type of buyer shapes both the price and the structure. A trade buyer in your sector can extract synergies (removing duplicated overheads, cross-selling to your customers) and can justify paying towards the top of the range, but often wants you tied in through an earn-out to protect what they are buying. A financial buyer, such as a private equity house or a search fund, prices on returns and leverage and tends to hold to a disciplined multiple, but can move quickly and pay largely in cash. A management team buying you out (an MBO) values continuity and knows the business, but is constrained by what it can fund. Understanding which type of buyer your business appeals to tells you both where in the range to aim and what the deal is likely to look like.
That modelling is core accountant work, and it is where valuation meets tax. The valuation sets the gross figure; what you keep depends on how the deal is structured and how the gain is taxed.
From valuation to net proceeds: the tax that decides what you keep
The headline valuation is not the cash you walk away with. On a share sale you pay Capital Gains Tax on the gain. Qualifying gains under Business Asset Disposal Relief are taxed at 18% from 6 April 2026 (up from 14% in 2025/26), up to the £1,000,000 lifetime limit, with the balance at the main 24% rate, after deducting the £3,000 annual exempt amount. On a £2.5m gain that difference between routes is measured in hundreds of thousands of pounds, so the after-tax number, not the valuation, is what should drive your decisions.
The route you choose changes the tax completely. A trade sale with BADR is one outcome. A sale to an Employee Ownership Trust is very different: following the 26 November 2025 Autumn Budget change, only 50% of the gain on a disposal to an EOT is now relieved, with the other 50% chargeable at sale (and BADR cannot be claimed on that taxable half). Guides that still describe a sale to an EOT as entirely CGT-free were written before that change and are now out of date. We cover the mechanics in our EOT tax and CGT guide. For the general CGT and BADR mechanics on a straightforward sale, see our dedicated selling your business: CGT and BADR guide rather than repeating them here. The point for valuation is simple: value the business, then model the tax on each realistic route before you commit to one.
Getting a formal valuation
An indicative valuation, from a rule of thumb or a calculator, is enough to decide whether a sale is worth pursuing and to set your expectations. A formal valuation is worth commissioning once you are serious, before you enter negotiations, agree heads of terms, or need a figure that must stand up to challenge. That includes tax-driven valuations for share schemes, gifts or probate, and valuations for a dispute, a divorce or a shareholder buyout, all of which follow specific rules and should be prepared by a specialist.
The principles of business valuation are set out by professional bodies including the ICAEW and, for regulated valuation work, the RICS. Where a valuation is needed for tax, HMRC's approach is documented in its Shares and Assets Valuation manual, and the reliefs that determine your after-tax outcome are set out in the government guidance on Business Asset Disposal Relief and the current Capital Gains Tax rates. This guide, and our calculator, give you an indicative figure and the framework to understand it; they are not a formal or RICS valuation, and they exclude the separate business-rates (Valuation Office) meaning of the word "valuation" entirely.
Use the valuation calculator, then plan the exit
The fastest way to turn this into a number for your own business is our business valuation calculator: enter your adjusted profit, pick your sector, add surplus cash and subtract debt, and it returns an indicative equity-value range with the multiple applied. For a step-by-step walkthrough of doing it yourself first, see how to value a business. When you are ready to act on the number, our sell my business guide covers the routes and the process end to end.