Business Valuations for SME buyers and sellers
- kamfaulkner
- Oct 8
- 4 min read
Updated: Oct 9
Selling or buying a business is usually the biggest deal of an owner’s life. Yet one of the first and most difficult questions is: “What’s it worth?”
The answer is rarely straightforward. There isn’t a single 'correct' value. There are different ways of looking at the numbers, each suited to particular types of businesses and circumstances. Advisers, banks, investors, and HM Revenue & Customs may all have slightly different views.
This guide sets out the main valuation methods you’ll hear about, explains them in plain English, gives practical examples, and highlights which sectors they’re commonly applied in.
It’s not about turning you into a valuation expert; it’s about helping you understand the options so you can have a meaningful conversation with your accountant, corporate finance adviser, or solicitor.
Why valuations matter
For sellers: you need a realistic view of price before marketing your business, otherwise you risk wasted time or disappointment.
For buyers: you need confidence you’re not overpaying and that your investment stacks up.
For both sides: valuations underpin deal structures, financing, tax, and negotiations.
Because valuations mix financial science with commercial judgment, they’re best treated as a range, not a single number. Advisers will often “triangulate” using the answer to two or three methods together in order to reach a price range.
The main ways to value a business
There are six key methods used in UK sales, for each one we'll run through how the method works, an example, and what type of businesses it's usually applied in.
Often these methods are used in combination, adjusted for future expectations, and act as a starting point for price negotiations.
1. Earnings multiples (P/E ratio, EBIT, EBITDA)
Example: A manufacturing company has adjusted EBITDA of £1.2m. Comparable deals in the sector suggest a 6x multiple. Valuation = £1.2m × 6 = £7.2m enterprise value.
Where it applies:
Trading companies with steady profits.
Most common in sectors like manufacturing, distribution, and services.
2. Discounted Cash Flow (DCF)
Example: If a business expects to generate £500k per year for 5 years, discounted at 10%, the present value is around £1.9m. Add a terminal value for ongoing cashflows, and you might reach £3m total.
Where it applies:
High-growth businesses where future performance matters more than the past.
Start-ups, tech firms, renewable energy projects, or long-term infrastructure plays.
3. Net Asset Value (NAV)
Example: A hotel business owns property worth £10m and has debts of £3m. Net asset value = £7m.
Where it applies:
Investment and property companies.
Asset-rich sectors like farming, hotels, nursing homes, golf clubs.
Also used as a floor valuation if trading profits are poor.
4. Dividend Yield
Example: If dividends are £50k and the expected yield is 5%, the value is £1m.
Where it applies:
Utilities, mature companies with strong, stable dividend records.
Rarely used for SMEs.
5. Industry “rules of thumb”
Example: An IFA business with £100m funds under management might be valued at 3%, i.e. £3m.
Where it applies:
Sectors with predictable margins and established market practice.
6. Comparable transactions (market multiples)
Example: If recent sales of regional logistics firms were at 5x EBITDA, that’s a useful benchmark for valuing another logistics company.
Where it applies:
Active M&A markets (tech, healthcare, logistics, professional services).
Particularly persuasive to buyers/sellers as it reflects real-world deals.
A summary of these six methods can be found here:
At-a-glance comparison of methods
Valuation Method | How it works | Pros | Cons | Typical Industries |
Earnings Multiples (P/E, EBIT, EBITDA) | Apply a multiple to adjusted profits | Widely used; reflects profitability; easy to benchmark | Relies on accurate adjustments; ignores future growth | Most trading companies (manufacturing, services) |
Discounted Cash Flow (DCF) | Forecast cashflows, discount to present value, add terminal value | Forward-looking; captures growth potential | Forecasts may be unreliable; complex | High-growth sectors (tech, renewables, start-ups) |
Net Asset Value (NAV) | Revalue assets at market value, subtract liabilities | Clear, asset-backed; useful for asset-rich | Ignores intangibles; may undervalue trading | Property, farming, hotels, investment trusts |
Dividend Yield | Value based on expected dividend return | Simple; stable for mature companies | Rarely applies to SMEs | Utilities, mature listed companies |
Industry Rules of Thumb | Apply sector ‘rules’ e.g. % of fees, turnover | Quick; reflects industry norms | Can be crude; ignores risk and profitability | Recruitment, IFA/wealth management, retail |
Comparable Transactions | Benchmark multiples from similar deals | Real-world evidence; persuasive in negotiations | Data can be hard to obtain; not always comparable | Tech, healthcare, logistics, professional services |
Quick decision guide
Common pitfalls for SME owners
Over-reliance on one method: Multiples can be misleading without adjustment.
Ignoring “normalisation”: One-off director salaries, family perks, or exceptional costs must be adjusted.
Forgetting working capital/debt: Buyers usually want a “cash-free, debt-free” deal with normalised working capital.
Overestimating growth: DCFs are only as good as their forecasts.
Not recognising sector trends: What applies in manufacturing may not apply in tech.
Getting ready for valuation
Key takeaway
Valuing a business is as much about judgment and context as it is about formulas. Different approaches suit different industries and different deal situations.
That’s why working with advisers who know your sector and the SME M&A market is critical. They’ll help you pitch your value realistically, negotiate effectively, and structure the deal to protect your interests.
Next steps
If you’re thinking about selling or buying a business and want to understand what it might be worth, talk to us:
📩 info@orbitlegal.co.uk | 📞 0115 6777095 |
Disclaimer
This content is for general information only and doesn’t constitute legal, accounting, financial, or tax advice. It’s based on the law of England & Wales and was correct at the date of publication, but the law and guidance can change. Reading this page doesn’t create a solicitor–client relationship with Orbit Legal. Please take advice on your specific circumstances before acting. Get advice for your situation by contacting Orbit Legal at info@orbitlegal.co.uk or 0115 6777095.
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