2 min read
Why valuation method matters
There is no single correct way to value a business. Lenders, acquirers, HMRC, and minority shareholders may each use a different approach, and the same company can produce very different figures depending on which method is applied. Understanding the main methods gives you a stronger position in any negotiation.
Valuation for a business loan is usually simpler than for a sale — a lender is primarily concerned with your ability to service debt, not the headline price your equity might achieve.
Earnings multiples — EBITDA and P/E
The most common method for trading companies is to apply a multiple to normalised earnings. EBITDA (earnings before interest, tax, depreciation, and amortisation) is the most widely used base figure because it strips out financing and accounting choices, making businesses comparable. A multiple is then agreed based on sector, growth rate, customer concentration, and market conditions.
Illustrative multiples for UK SMEs have historically ranged from roughly three to six times EBITDA, though high-growth technology or recurring-revenue businesses can command significantly more. These are market reference points, not guarantees — always verify with a qualified corporate finance adviser before relying on them.
Net asset value — for asset-heavy businesses
If your business holds significant tangible assets — property, plant, vehicles, or stock — the net asset value (NAV) method may be more relevant than an earnings multiple. NAV is the total value of assets on the balance sheet minus total liabilities. For a property company or manufacturing business, this can produce a higher figure than an earnings-based approach.
Assets should normally be restated to market value rather than book value, which requires professional valuations of property and specialist equipment.
Discounted cash flow — for predictable businesses
A DCF model projects future free cash flows and discounts them back to today's value using an appropriate discount rate (reflecting risk). It is theoretically the most rigorous method but requires reliable forecasts and a defensible discount rate — both of which are difficult to establish for most SMEs.
DCF is most credible for businesses with long-term contracted income, subscription models, or stable public-sector clients where cash flows are genuinely predictable over a five-to-ten-year horizon.
Normalising your accounts before valuation
Buyers and lenders will scrutinise your P&L for non-recurring items, director drawings structured as salary, related-party transactions, and one-off costs or revenues. Normalising means restating the accounts to show what the business earns under typical conditions, free from owner-specific distortions.
Common adjustments include adding back excessive director remuneration above a market salary, removing one-off legal costs or asset disposals, and smoothing lumpy project revenues. A good accountant will help you produce a credible normalised EBITDA figure before you begin any sale or fundraising process.
Frequently asked questions
Does a higher valuation help when applying for a business loan?
Not directly. Commercial lenders primarily assess your ability to service debt from operating cash flow, not the headline equity value of the business. A strong, consistent EBITDA and clean balance sheet are more useful than a high theoretical valuation.
Do I need a formal valuation report from a professional?
For most commercial lending purposes, no — your filed accounts and management accounts are sufficient. A formal valuation report is more likely to be required for a share sale, HMRC share scheme approval (EMI/SeedEIS), or shareholder dispute.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.