How to value a business before you buy it

Most guides to valuing a business are written for sellers. They tell an owner how to get the highest number. This one is for the other side of the table: you, deciding what a business is worth to you and what you should actually pay.

You are buying a stream of future profit and paying for it today. Everything below is about working out how much of that profit is real, what it is worth, and how to turn that into a price you will not regret.

What is the difference between value, price and affordability?

Three numbers get mixed up in most early conversations, and keeping them apart is the simplest protection against overpaying.

• Value is what the business is worth to you, based on the profit it will make under your ownership and the risks attached to it.
• Price is what you agree to pay the seller. It includes how and when you pay, not just the headline figure.
• Affordability is whether you can fund that price and still run both businesses comfortably if trading dips.

A business can be good value and still unaffordable. It can also be affordable and poor value. You need all three to line up.

One more point that catches people out: your own turnover tells you nothing about what a target is worth. A £20m business buying a £3m one should value the target on the target's profit and risks, not on its own scale.

Which earnings are real?

Start with the profit the business will keep making, year after year, once the current owner has left. Advisers call this "maintainable" or "normalised" earnings. For most UK small and mid-sized businesses, buyers use EBITDA (operating profit before interest, tax, depreciation and amortisation), a rough measure of the cash the business produces before financing and tax.

Sellers usually present an "adjusted" figure. Some adjustments are fair and some are wishful. These are the ones to look at hardest:

If a cost turns up most years, it is a normal cost, not a one-off. The aim is not to squeeze the seller. It is to reach a number you believe. A seller is far more likely to accept your figure if you show your working line by line.

Due diligence (checking what you're really buying) is where these numbers get tested properly. Our due diligence checklist sets out what to ask for.

Which valuation method fits?

There is no single formula for valuing a small or mid-sized business. Each method suits a different kind of business, and careful buyers use one main method and one as a check.

The multiple is where most buyers reach for a benchmark. UK data does give useful signals. Dealsuite's survey of UK and Irish M&A advisers found an average of 5.4x EBITDA across deals in the second half of 2025, but 3.3x for businesses with £200,000 of normalised EBITDA against 8.4x at £10m. Price Bailey's analysis of UK deals found that multiples for businesses worth under £5m were consistently below 5x over the 12 months to June 2026.

Those figures describe different populations and periods, and neither tells you what one particular business is worth. Our guide to UK SME acquisition multiples explains how to read them. The short version: start from evidence, then move up or down for the risks you can see. Heavy reliance on the owner, a few large customers or thin management should push your figure down. A strong second tier of managers and a broad, loyal customer base can support a higher one.

How does enterprise value become the price for the shares?

This is the step many first-time buyers miss. A multiple of EBITDA gives you enterprise value: the value of the business as if it had no debt, a normal amount of cash and a normal level of working capital (stock plus money owed by customers, less money owed to suppliers). What you pay the seller for the shares is the equity value.

To get from one to the other:

1. Deduct debt. Bank loans, asset finance, overdrafts and loans the company owes the owner.
2. Deduct debt-like items. Unpaid tax, overdue supplier bills, holiday pay owed, and big repairs the seller has put off.
3. Add surplus cash. Only cash above what the business needs to trade day to day.
4. Adjust for working capital. Agree a normal level (often an average over the last 12 months). If working capital at completion is below it, the price falls by the difference. If it is above, the price rises.

The working capital adjustment matters because a seller can pull cash out of a business before a sale by chasing debtors hard, delaying suppliers or running stock down. Without it, you can end up paying for the same cash twice.

Worked example: from profit to price

Illustrative and fictional. The business, figures and multiples below are made up to show the method. The multiples are assumptions for the example, not a benchmark or a valuation opinion.

Fernside Components Ltd is a fictional UK manufacturer with £5.0m revenue and £600k reported EBITDA. The owner is retiring. His adviser presents adjusted EBITDA of £700k.

Step 1: rebuild maintainable EBITDA (£000)

Step 2: apply an assumed range. For this example we assume 4.5x to 5.5x, with 5.0x as the central case, because two customers make up 35% of sales.

Step 3: bridge to equity value (£000)

At the central case you would also pay stamp duty of 0.5% on the shares (about £11k), plus your own legal, accounting and tax costs.

Two things stand out. First, rebuilding the profit moved the value far more than the choice of multiple did. Second, half a turn of multiple either way moves the price by about £265k, which is why the evidence behind the multiple matters.

If the seller still believes in his £700k figure, you do not have to argue. You can offer to pay part of the price later if the business delivers (an earn-out), so he is paid for that profit only if it arrives.

What should you check before going further?

Before you agree the price and main terms in writing, run through these questions:

1. Have you rebuilt EBITDA yourself rather than starting from the seller's adjusted figure?
2. Have you tested the range? What happens to the price, and to your funding, at the low and high ends?
3. Is every debt and debt-like item listed and agreed in principle?
4. Is the working capital mechanism agreed in the heads of terms, not left until the end?
5. Can you fund it and repay it from the target's maintainable profit, with room for a bad year? Our guide to acquisition finance covers the options.
6. Have you set a walk-away price and told someone who will hold you to it?

You can do a first-pass valuation yourself with this method and a good accountant. Bring in specialists (accountants for the financial and tax work, solicitors for the legal work) before you commit, and get help when the deal is large relative to your balance sheet, when the seller has an adviser and you do not, or when the structure is doing a lot of the work.

Talk it through

If you have a business in view and want a second opinion on how to approach the price, book an Expansion Briefing. It is a free 30-minute call with us about what you want to buy and whether the numbers make sense, followed by a short written summary.