When it comes to running a business, few questions are as important, or as misunderstood, as:
“what is my business worth?”
Whether you’re planning a future sale, bringing in investors, or just aiming to build value over time, understanding how business valuation works can help you make smarter strategic decisions.
This article breaks down what your business might be worth, how it’s valued, and what you can do to increase that value, in simple terms, with examples.
Why valuation matters
Understanding the current value, and them measuring it regularly, moving forwards, helps you to:
- Measure long-term progress of your business
- Identify what drives value (and what holds it back)
- Raise investment or finance
- Plan your exit or succession
- Protect your family’s wealth
Even if you’re not planning to sell for years, building a valuable business now puts you in control of your future.
The basics: enterprise value (EV) v. equity value
When valuing a business, it’s important to understand two key terms:
- Enterprise Value (EV): The value of the business, regardless of how it’s financed. Think of this as what a buyer would pay to own the trading business outright. It’s often calculated as a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation).
- Equity Value: The value of your shares, after adjusting the EV for things like cash, debt, or other liabilities.
Simple example:
Let’s say your business has an enterprise value of £500,000. That might, for example, be based on annual EBITDA of £100,000 with an EBITDA multiple of 5.
It has £100,000 in cash but owes £100,000 in outstanding loans.
With the cash, it’s important to know whether the £100,000 represents a fair amount to be holding for a business of this size. If we took the view that a business needs to hold three times its monthly fixed costs, and this business had fixed costs of £30,000 per month, then the cash it needs is £90,000. If it’s holding cash of £140,000, then there is £50,000 of what we can call ‘excess cash’.
Equity Value = £500,000 (EV)
Plus £50,000 (excess cash)
Minus £100,000 (debt)
= £450,000 equity value
If you own 100% of the shares, your stake is worth £450,000. If you own less than 100%, your shareholding will usually be discounted due to lack of control, but more on that shortly.
Arriving at enterprise value (EV)
There are many ways to value a business, but the most common method for profitable trading companies is the EBITDA multiple approach.
EBITDA = Earnings before interest, tax, depreciation and amortisation
This is seen as a clean, cash-focused measure of a business’s profit
The basic formula is:
Enterprise Value (EV) = EBITDA × valuation multiple
What determines the EBITDA valuation multiple?
In the UK, small business EBITDA multiples typically range from 2x to 6x but can go much higher for larger or strategic businesses.
Here are the biggest factors that affect your multiple:
Factor | Effect on Valuation Multiple |
Size of the business (turnover/profit) | Larger businesses attract higher multiples |
Sector | High-growth or tech sectors often command more |
Customer base | Recurring income = higher multiple |
Dependency on owner | If the business runs without you, it’s worth more |
Growth potential | Strong pipeline = increased value |
Financial records | Clean, accurate accounts build trust |
Risk profile | High risk = lower multiple |
Example: two small businesses compared
Business A
EBITDA: £100,000
Sector: IT services
Owner-managed, small team
Clients on rolling contracts, not fixed
Valuation multiple: 3x
Enterprise Value = £300,000
Business B
EBITDA: £100,000
Sector: Niche software platform
Team in place, not reliant on owner
80% recurring revenue on 12-month licences
Clear growth trajectory
Valuation multiple: 5x
Enterprise Value = £500,000
Same profit, different value. The key is quality, not just quantity.
Adjusting for debt and cash: equity value
Let’s apply the equity value calculation to Business B above, making the following additional assumptions:
Excess cash in bank (let’s say): £20,000
Outstanding director’s loan (debt owed by the company): £30,000
Bank loan (debt owed by the company): £70,000
EV: £500,000
Add: £20,000
Less: £30,000 + £70,000 = £100,000
Equity Value = £420,000
That’s what a buyer would be willing to pay for 100% of the company shares.
What if you don’t own 100%?
If you own less than 100%, your shareholding is often worth less per share than if you owned the whole business. This is because minority shareholders:
- Can’t control business decisions
- May not be entitled to dividends
- Can’t easily sell their shares
These are called minority discounts and can range from 10% to 40% or more.
Example:
You own 40% of Business B, above, which has an equity value of £420,000.
Without a discount:
40% × £420,000 = £168,000
With a 25% minority discount applied:
£168,000 × 75% = £126,000
How to increase the value of your business
Whether you’re aiming to sell or just build a stronger company, here are some key strategies to grow value:
- Increase EBITDA
Obvious, but true. Higher profits = higher value.
This can be done through:
- Pricing improvements
- Cost reductions
- Increasing efficiency
- More profitable product/service mix
- Move to recurring revenue
Businesses with predictable income attract higher multiples.
Consider:
- Service contracts
- Memberships
- Licensing or subscriptions
- Reduce dependency on the owner
Buyers pay bigger multiples for businesses that don’t rely on the founder.
Steps to take:
- Delegate operations
- Create systems and documentation
- Hire a general manager
- Build a strong brand and market position
A business with a unique selling point (USP), strong online presence, or niche market is more attractive and will command a higher multiple.
- Clean financial records
Accurate, up-to-date, and professional accounts increase buyer confidence and can reduce the due diligence period.
Final thought: it’s never too early to build value
You don’t have to be thinking about selling to take value seriously. A business that’s sale-ready is also:
- Easier to manage
- More attractive to funders
- More secure for your family
- More fun to run!
If you’d like to find out what your business might be worth, or how to start building value now, speak with EBA. We can guide you through valuation, goal setting, and business improvement strategies tailored to your unique situation.
