Business Valuation Methods: The UK Guide

The six methods that matter in the UK

There is no single "correct" way to value a private company. There is a set of recognised methods, and the skill lies in choosing the ones that fit the business in front of you, then reconciling them into a range.

Six methods account for essentially all UK private company valuation work:

Everything below sets out how each works, where it breaks, and how a valuer decides which one leads.

> For the mechanics of building a number from start to finish, see How to value a UK business. This guide is about choosing between the methods.

1. Earnings multiples

How it works

Enterprise value equals adjusted EBITDA multiplied by a multiple drawn from comparable transactions and listed peers. Equity value is then enterprise value less net debt plus surplus assets.

This is the default method for UK SMEs and underpins the large majority of completed private company transactions.

Why it dominates

Buyers think in multiples. Lenders underwrite in multiples. Sector transaction evidence is published in multiples. A valuation expressed any other way has to be translated back into one before a buyer will engage with it.

Where it breaks

• The business is loss-making or the earnings base swings year to year
• The historic period includes a distortion that has not been normalised out
• There is no observable transaction evidence in the sector
• Profit is deliberately suppressed for tax reasons and the add-backs cannot be evidenced

The quality of an earnings multiple valuation is decided almost entirely by the quality of the EBITDA adjustments behind it.

Variants

EBIT multiples are used where capital intensity varies sharply between comparables, because depreciation is a real economic cost in those sectors. PE ratios apply to post-tax earnings and equity value directly, and are more common in listed comparisons than in UK SME deals. EBITDAR strips out rent and appears in hospitality and leisure where property arrangements differ across the peer set.

2. Seller's discretionary earnings

How it works

SDE is EBITDA plus one full-time owner's total remuneration and benefits. It answers a different question: what does this business put in the pocket of a single working owner? The multiple applied is correspondingly lower, typically 1.5x to 3.5x.

When to use it

For businesses below roughly £500k of turnover-scale profit where the buyer will replace the owner personally rather than employ a manager. Owner-operated retail, trades, small agencies, single-site hospitality and professional practices are the typical cases.

The trap

SDE and EBITDA multiples are not interchangeable. Applying a 5x EBITDA multiple to an SDE figure inflates the answer materially, because SDE already contains the owner's salary that EBITDA properly deducts. Broker marketing material frequently blurs this distinction, and it is the single most common source of unrealistic price expectations among small UK business owners.

Worked comparison

A business with £180k of statutory profit, an owner drawing £70k and £15k of personal costs run through the company:

The two land in the same territory, which is the point. Where they diverge sharply, one of the two multiples has been misapplied.

3. Discounted cash flow

How it works

Forecast unlevered free cash flow over an explicit period, typically three to five years, then add a terminal value. Discount everything back at the weighted average cost of capital to give enterprise value.

When it leads

• Contracted revenue streams with visible duration - infrastructure, energy, long-cycle engineering
• Businesses growing fast enough that a trailing multiple materially understates them
• Situations where the earnings profile changes structurally, such as a facility coming on stream

Why it rarely leads for an SME

Two inputs dominate the answer and neither can be verified by a third party. Terminal value routinely accounts for 60% to 80% of the total, and it is driven by a long-term growth rate assumption. The discount rate for an unquoted UK SME involves size and specific-risk premia that are matters of judgement, not observation.

A one-point change in WACC or half a point on terminal growth can move the conclusion by 20% or more. That sensitivity is why DCF is a cross-check for most UK SMEs rather than the headline, and why HMRC and opposing experts scrutinise it hard.

Making a DCF defensible

Show the sensitivity table. A DCF presented as a single number invites the challenge that a different, equally reasonable assumption set gives a different answer. A DCF presented as a matrix across WACC and terminal growth pre-empts it.

4. Net asset value

How it works

Restate the balance sheet to realisable values: property to market value, plant to second-hand value, debtors net of realistic bad debt, stock net of obsolescence. Deduct all liabilities, including deferred tax on revaluation gains.

When it leads

• Property investment and development companies
• Investment holding companies
• Asset-heavy businesses whose earnings do not justify a premium over asset value
• Companies in distress or being wound down

When it is the floor

For a profitable trading company, NAV sets a minimum. No rational owner sells a trading business for less than the realisable value of its assets net of wind-down costs. If an earnings valuation lands below NAV, the earnings basis is telling you the trade is destroying value.

Break-up versus going concern

A break-up NAV assumes an orderly liquidation and deducts realisation costs, redundancy and lease exit provisions. A going-concern NAV does not. The difference is often 20% to 30% of gross asset value, so the basis must be stated explicitly.

5. Revenue multiples

Used where profit is not yet a meaningful measure of the business. In UK practice that is mostly recurring-revenue software and subscription businesses, where value is priced on annual recurring revenue at a multiple driven by growth rate, gross margin and net revenue retention.

Applied outside that context, revenue multiples are unreliable. A 1x revenue rule of thumb for an agency or a distributor implies wildly different earnings multiples depending on margin, and no buyer prices that way.

6. Dividend yield and earnings bases for small holdings

For a small minority holding that cannot influence policy, the holder receives dividends and nothing else until an exit. Valuing the income stream on a dividend yield basis, benchmarked against yields on comparable quoted shares with an uplift for illiquidity, reflects what the holder actually owns.

This basis appears frequently in HMRC-facing valuations of small stakes and in probate work. For holdings large enough to influence distribution policy, an earnings basis with a minority discount and a DLOM is the more common route.

Choosing between the methods

Three rules govern the choice in practice.

The method follows the business, not the answer. Selecting the method that produces the most attractive number is the fastest way to lose an argument with a buyer's advisers or with HMRC.

Two methods minimum. A single-method valuation has nothing to reconcile against. Where two methods diverge sharply, the divergence is the finding: it usually means the earnings base is unstable or the balance sheet holds value the trade does not use.

Purpose drives basis before method. A sale value, an EMI value and a probate value are different numbers for the same company. See Sale value vs tax value.

What HMRC and the courts accept

HMRC Shares and Assets Valuation does not mandate a method. It expects the method to fit the company and the holding, and it expects the reasoning to be visible. In practice:

• Earnings bases are accepted for trading companies with a reliable profit record
• Asset bases are expected for investment and property companies
• DCF attracts scrutiny and is rarely accepted alone for an established SME
• Discounts must be justified by reference to the specific rights attaching to the holding, not applied as a standard percentage

In shareholder litigation, the court appoints or accepts an expert whose duty is to the court. The same evidential standard applies: a method chosen without stated reasoning is the first thing cross-examination attacks. See What is HMRC SAV and Unfair prejudice valuations.

Rules of thumb, and why they are not methods

Sector rules of thumb exist across the UK market: multiples of recurring fees for accountancy practices, per-chair valuations for dental practices, multiples of gross written premium for insurance brokers.

They are useful as a sanity check and as a starting point in negotiation. They are not a valuation method, because they capture none of the specific risk factors - customer concentration, owner dependency, margin trajectory - that decide where inside a range a business actually sits. A rule of thumb that conflicts with an earnings valuation is a prompt to check the earnings work, not a reason to override it.

FAQ

Related guides

• How to value a UK business - the full process end to end
• Business Valuation Calculator - indicative equity value in two minutes
• UK SME EBITDA multiples 2026 - sector benchmark ranges
• EBITDA adjustments - building the earnings base
• Sale value vs tax value - why purpose changes the number