How a business is valued before sale: multiples, EBITDA and proceeds.

What a valuation is actually estimating

A buyer is not paying for last year's profit. They are paying for their own belief about future profit, discounted by the chance that the belief is wrong. Everything in a valuation follows from that. Maintainable earnings answer the first half of the question, and the multiple answers the second: how confident a reasonable buyer can be that those earnings will still be there in two years, under different ownership, without the person who built the business.

This is why two companies with identical profits can be valued very differently, and why a valuation produced from a formula alone rarely survives contact with a real buyer. If you want a considered view of your own company rather than the mechanics, that is what our business valuation service is for.

What is maintainable EBITDA?

Maintainable EBITDA is the level of earnings before interest, tax, depreciation and amortisation that the business could reasonably be expected to repeat, after removing items that are not part of normal trading. It is a judgement, arrived at by normalising the reported figures rather than by taking any single year at face value.

Normalisation typically considers owner remuneration and benefits set at a level a replacement manager would not command, genuinely one-off costs and one-off income, personal expenditure run through the company, related-party transactions on non-commercial terms, and unusual trading periods. It also works in the other direction: costs the business has avoided but will have to bear under new ownership, such as a market-rate salary for a role the owner performs unpaid, or rent on premises currently owned personally, belong in the maintainable figure as a deduction.

The weighting of years matters as much as the adjustments. A stable business is often assessed on a recent average; a business with a clear trend is assessed on where that trend appears to be heading, with the buyer discounting the most optimistic reading. Preparing that analysis before a buyer produces their own version is one of the most useful things an owner can do, and it is covered in preparing a business for sale.

What multiple should be applied to EBITDA?

There is no standard multiple, and any adviser quoting one without seeing the business is guessing. A multiple is a statement about risk and demand, and it is set by the characteristics of the specific company and by how many buyers want it. The useful question for an owner is not what the multiple is, but which of the factors below they can influence before going to market.

Sector matters too, but less than owners expect and less than the factors above. Within any sector there is a wide spread between a well-prepared, well-managed company with contracted revenue and a similar-sized business dependent on its founder.

What is the difference between enterprise value and equity value?

Enterprise value is the value of the trading business irrespective of how it is financed. Equity value is what the shareholders receive for their shares. The bridge between them adds surplus cash, deducts borrowings and debt-like items, and adjusts for any difference between actual working capital at completion and the agreed normal level. Almost every offer letter quotes enterprise value, and almost every seller reads it as equity value.

The following bridge is illustrative and uses round numbers to show the arithmetic. It does not represent any transaction handled by EXITS.co.uk. Take maintainable EBITDA of £1,000,000 and an agreed multiple of six, giving an enterprise value of £6,000,000. Add surplus cash of £400,000. Deduct bank borrowings and finance leases of £900,000. Deduct £100,000 of accrued pre-completion bonuses treated as debt-like. Deduct £150,000 because delivered working capital sits below the agreed target. The indicative equity value is £5,250,000 against a headline of £6,000,000. Nothing improper has occurred: the buyer is not paying for cash they must inject, and is not silently assuming borrowings they did not price.

Why is the headline offer different from what the seller receives?

Because the headline number values the business, while the amount received is what remains after the balance sheet is settled and the payment structure is applied. The gap is created by mechanisms that are visible in the heads of terms and largely negotiable, which is why they deserve attention long before completion.

Tax sits outside the transaction value entirely. A share disposal is a chargeable event for the shareholders, and the amount finally retained depends on their own circumstances, the structure agreed and the legislation in force at completion. That is a matter for the seller's own accountant, not for an offer letter. The mechanics of the balance sheet elements are explained in cash-free, debt-free, working capital adjustments and earn-outs and deferred consideration.

Is a business worth whatever a buyer is prepared to pay?

In practice, yes: the transaction value is the figure a specific buyer agrees with a specific seller on specific terms. A valuation is the disciplined estimate of where that agreement is likely to fall, and it is useful precisely because it identifies the arguments each side will make. It is not an entitlement.

What converts an estimate into an outcome is demand. Buyer appetite varies by sector, by acquirer type and by the point in their own planning cycle. A trade buyer who can remove duplicated cost or acquire a customer base they cannot build organically may see value that no purely financial calculation would produce. A private equity buyer will focus on management depth, cash conversion and the credibility of the growth plan. A management buyout depends on what funding the team can raise, which is a different constraint again.

Terms and price are also traded against each other. A higher headline supported by a large earn-out and a long restrictive covenant can be worth less, in cash and in freedom, than a lower figure paid in full at completion. The highest number on the table is not automatically the best commercial deal, and comparing offers properly means comparing structure, conditionality and certainty alongside the price.

What owners and buyers argue about

Adjustments are the first battleground. Owners routinely expect buyers to accept add-backs that a buyer's accountant will reject: discretionary marketing the business will need to continue, deferred maintenance, a family member's salary where the role must be replaced, and costs described as one-off that have appeared in three consecutive years. The commercial damage runs beyond the individual item. Once one adjustment fails, every other figure in the pack is treated as advocacy rather than analysis.

Sophisticated buyers challenge adjusted EBITDA as a matter of routine, and they do it with a quality of earnings exercise rather than an argument. That analysis tests whether revenue is recognised consistently, whether margins are genuine or supported by underinvestment, whether cash conversion matches reported profit, and whether the customers behind the earnings are contracted or simply habitual. A seller who has done that work first is negotiating; a seller who has not is responding.

Recurring revenue improves the perceived quality of earnings because it reduces the amount of next year's profit that has to be won again from scratch. Customer concentration works the other way, and it often affects structure rather than only the multiple: a buyer who is uneasy about a dominant account may prefer to put part of the price behind an earn-out or a retention rather than reduce the headline. Owner dependence has a similar dual effect, reducing confidence in the maintainable figure and increasing the likelihood of a long handover.

The most avoidable damage comes from an expectation set too high and defended too long. Buyers withdraw quietly, advisers stop introducing opportunities, and a business that has been visibly available for a long period is harder to sell later at any price. A realistic range, tested against genuine interest, protects the process. Negotiating with several credible buyers rather than one is the strongest position an owner can hold, and it changes far more than the price: it shapes the exclusivity period, the diligence burden and the willingness to accept sensible risk allocation.

Where valuation fits in a sale process

A valuation is the start of a process, not a document to file. It should tell an owner three things: the range a well-run process could reasonably achieve, the specific weaknesses that will be priced against them, and how long it would take to address those weaknesses. Owners who use it that way often delay going to market by a year and recover the delay several times over.

If you want a considered assessment of your own company, request a business valuation. If you are further along and want to understand how a sale is run, selling your business sets out the process and what representation involves. Related commentary is collected in the business valuation insights archive.

How do buyers test the numbers behind a valuation?

Through a quality of earnings review, which is narrower and more forensic than an audit. It asks whether reported profit converts into cash, whether revenue recognition is consistent between periods, whether margin has been protected by genuine pricing or by deferring investment, and whether the adjustments proposed by the seller survive examination. The review usually looks at monthly rather than annual data, because annual figures conceal the volatility a buyer is trying to price.

A seller cannot prevent that scrutiny, but can decide whether to meet it prepared or otherwise. The businesses that hold their valuation through diligence tend to share the same characteristics: monthly management accounts that reconcile to the statutory position, a written and evidenced schedule of adjustments, contracts and terms available for the largest customers, and a management team able to answer questions without the owner in the room. Due diligence preparation sets out what that evidence pack contains.

How often should a valuation be revisited?

Annually for an owner planning an exit within five years, and again immediately before going to market. A valuation reflects the trading position, the balance sheet and the buyer appetite of a moment, and all three move. A figure produced two years ago and still quoted today is not a valuation; it is a memory, and it is a common reason for expectations that no live process can meet.

Revisiting also serves a second purpose. Comparing this year's assessment with last year's shows whether the work done in between actually moved value, or only moved effort. Owners who reduce customer concentration, convert project income into contracted income, or build a management layer beneath themselves can usually see the effect in the range and in the structure buyers are willing to offer. Owners who improve profit alone, while remaining the single point of dependence, often find the range widens very little. Where an exit is still several years away, that comparison is the core of exit planning.

This page is general information about the law and tax treatment of business sales in the United Kingdom as at 9 August 2026. It is not personal advice, and the treatment of any particular transaction depends on how the deal is structured, the shareholders' own circumstances, the status of the company, the legislation in force at completion and the interpretation of your own accountant and solicitor. Take advice on your own facts before acting.