How to value a small business — How-to

2 min read

Multiplex earnings

AssetsOr net value

Cash flowDCF method

Step 1: Clean up the numbers

A credible valuation starts with reliable figures. Normalise the accounts — strip out one-offs, adjust owner's pay to market rate — to reveal the true underlying earnings. A buyer values sustainable profit, not a flattered snapshot.

Step 2: Apply an earnings multiple

The most common method multiplies a measure of profit — often EBITDA or adjusted profit — by a sector multiple. The multiple reflects growth, risk and how dependent the business is on its owner. Higher-quality, less owner-dependent businesses command higher multiples.

Step 3: Cross-check with assets and cash flow

For asset-heavy businesses, an asset-based valuation (net assets from the balance sheet) sets a floor. For stable, predictable earners, a discounted cash flow projects future cash and discounts it to today. Use these to sanity-check the multiple.

Step 4: Adjust for the intangibles

Customer concentration, recurring revenue, key-person risk, contracts and reputation all move the number. A business that runs without its owner and has sticky revenue is worth far more than one that does not — even at the same profit.

Step 5: Fund the deal

Whether buying or investing to grow value before a sale, acquisition and growth finance can bridge the gap.

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See funding a management buyout.

Frequently asked questions

How do you value a small business?

Usually by applying a sector multiple to normalised profit (often EBITDA), cross-checked against net assets and, for stable earners, discounted cash flow. There is no single formula — triangulating methods gives a defensible figure.

What increases a business's value?

Sustainable, growing profit; recurring revenue; low dependence on the owner; diversified customers; and solid contracts. A business that runs without its founder and has sticky income commands a higher multiple than one that does not.

Why normalise the accounts before valuing?

To reveal true underlying earnings. Stripping out one-off items and adjusting owner's pay to a market rate shows the sustainable profit a buyer is really paying for, rather than a flattered or depressed snapshot.