What is my business worth? Why there is no magic multiple

Ask ten people what a business like yours is worth and you will probably hear a multiple: four times profit, six times, sometimes more. Multiples are a useful shorthand, but they are the result of a valuation, not the starting point. Two businesses with identical profits can be worth very different amounts.

Start with maintainable profit

Buyers are paying for the profit they believe the business will continue to generate once they own it. The first job is therefore to establish a realistic, maintainable figure, usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation), rather than simply taking last year’s accounts at face value.

That means making adjustments, in both directions:

• Owner remuneration. If you pay yourself well below, or well above, what it would cost to employ someone to do your job, profit should be adjusted to a market rate.
• One-off costs and income. A legal dispute, a relocation or an unusually large one-off contract will not recur and should be stripped out.
• Personal and related-party costs. Family members on the payroll who do not work in the business, personal expenses, or rent paid to yourself at a non-market rate.
• The trend. A business growing steadily is viewed very differently from one whose best year was three years ago.

Every adjustment will be tested in due diligence. Credible, well-evidenced adjustments support value; optimistic ones tend to be reversed later, often at the worst possible moment.

Then consider risk

The multiple a buyer is prepared to pay reflects how confident they are that those profits will continue. The factors that most often move it are:

• Customer concentration. If one or two customers account for a large share of revenue, a buyer will ask what happens if they leave.
• Dependence on the owner. If key relationships, pricing decisions and technical knowledge all sit with you, the business is harder to transfer.
• Quality of revenue. Contracted, recurring or repeat revenue is worth more than work that has to be won again every year.
• Management and people. A capable second tier that can run the business day to day reduces risk significantly.
• Financial information. Timely, accurate management accounts give buyers confidence. Delayed or inconsistent numbers do the opposite.

Buyer appetite matters

A business is ultimately worth what a credible buyer will pay for it, and different buyers value the same business differently. A trade buyer may see cost savings or cross-selling opportunities and be able to pay more. A private equity investor will focus on the management team and the potential to grow. An individual or family buyer may prioritise stability and long-term income.

Market conditions change too. Consolidation in your sector, the availability of finance and recent transactions in your market all affect appetite. That is why timing, and a well-run process that creates genuine competition, can make a meaningful difference to the outcome.

A good valuation doesn’t give you a single number. It gives you a realistic range, and a clear list of what would move it.

Growth: evidence beats optimism

Buyers will pay for growth they can see and believe: a pipeline, signed contracts, new services already gaining traction. Forecasts that rely on a sudden change in performance are usually discounted heavily, or converted into deferred or earn-out payments so that the seller carries the risk.

Value is not the same as what you receive

Valuations are normally expressed on a “cash-free, debt-free” basis. The amount you actually receive is adjusted for the cash, debt and working capital in the business at completion, and depends on how the consideration is structured. We explain how that works in a separate article.

What you can do now

• Produce reliable monthly management accounts, and keep them consistent with your statutory accounts.
• Start reducing the business’s reliance on you: delegate key relationships and decisions.
• Put important customer and supplier arrangements into written contracts.
• Widen the customer base where you can.
• Give yourself time. Two or three years of preparation is rarely wasted.

Peter Hogan is the founder of Hogan Capital and has spent almost nine years working with owner-managed businesses, predominantly across mergers and acquisitions. More about Peter or connect on LinkedIn.

This article is general information and does not constitute financial, legal or tax advice. Figures are illustrative.