Business Valuation Guide
A Guide to SME Business Valuation
Understanding what a business may be worth requires more than applying a generic multiple to its latest profit figure. This guide explains the principal concepts used in SME business valuation, including maintainable earnings, EBITDA multiples, business quality, Enterprise Value and Equity Value.
It is intended to help business owners, buyers and advisers understand the factors that commonly influence the value of established private businesses.
01 — Valuation fundamentals
What does a business valuation represent?
Private-company valuation is an estimate rather than an objectively observable market price. The value ultimately achieved can depend on the buyer, strategic rationale, financing, transaction structure, market conditions, due diligence and negotiation.
What is Enterprise Value?
Enterprise Value represents the value of the underlying business operations irrespective of financing structure and before transaction-specific adjustments for cash, debt and debt-like items.
Why is business valuation usually a range?
There is rarely one objectively “correct” value for a private company. Presenting conservative, midpoint and optimistic values better reflects valuation uncertainty than false precision.
02 — Establishing the earnings base
From reported EBITDA to maintainable earnings
Valuation should generally be based on sustainable economic earnings rather than blindly applying a multiple to reported EBITDA.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. It is commonly used when comparing operating businesses because it removes the effects of financing structure, taxation and non-cash depreciation and amortisation, focusing on underlying operating performance.
Why normalise EBITDA?
Reported accounts may contain exceptional, non-recurring, owner-specific or non-operating items that do not reflect the sustainable economics of the business. Normalisation adjusts for these to present a fairer picture of the earnings a new owner could expect.
What are EBITDA add-backs?
Legitimate examples include exceptional costs and owner remuneration above an appropriate market replacement cost. An expense should not automatically be added back simply because the current owner regards it as discretionary.
Can EBITDA be adjusted downwards?
Yes. Normalisation is not simply about increasing earnings. Exceptional income, understated owner remuneration, missing replacement-management costs or other unsustainable benefits may require downward adjustments.
What is Maintainable EBITDA?
Maintainable EBITDA represents the level of adjusted earnings reasonably expected to be sustainable under normal ownership. It is the earnings base to which a valuation multiple is applied.
03 — Understanding valuation multiples
Why businesses trade at different EBITDA multiples
An EBITDA multiple represents the relationship between maintainable operating earnings and Enterprise Value, but there is no universal SME multiple.
Why does business size affect valuation multiples?
Larger businesses often benefit from greater management depth, financial resilience, access to capital, a broader buyer universe and improved transferability. These factors can influence observed transaction multiples, though size is not a guarantee of lower risk in every case.
Why do valuation multiples vary by sector?
Different industries have different growth prospects, recurring revenue characteristics, capital intensity, margins, cyclicality, barriers to entry and market risk. Market transaction evidence reflects these differences.
Why shouldn't a generic multiple be used?
Simply applying “4× EBITDA” or another arbitrary market rule can overlook substantial differences between businesses in quality, size, sector, growth and risk, producing a misleading estimate of value.
ValuBase calibrates its baseline multiple using business size and the selected sector/subsector before considering company-specific characteristics. Proprietary calibration data is not disclosed.
04 — Business quality and value
Why two equally profitable businesses may have different values
Identical EBITDA does not imply identical value because the quality, resilience and transferability of those earnings can differ materially.
Recurring revenue
Predictable, contracted or repeat revenue can improve earnings visibility.
Customer concentration
Heavy reliance on one or a small number of customers increases revenue risk.
Owner dependence
Businesses heavily dependent on the owner for relationships, sales, technical knowledge or operations may carry greater transition risk.
Competitive position
Market position, differentiation, pricing power and barriers to entry can affect attractiveness.
Management and operations
Management depth, operational resilience, supplier dependence and capital requirements can affect transferability.
Financial information quality
Reliable financial reporting and a credible trading history can reduce uncertainty for prospective buyers.
Valuation is therefore not simply a function of profit. It is also a function of the quality and transferability of that profit.
05 — Enterprise Value and Equity Value
Enterprise Value is not the same as the value of the shares
Enterprise Value represents the indicative value of the underlying operations. Equity Value represents the value attributable to shareholders after relevant transaction adjustments.
In an actual transaction, the amount payable for the shares is typically bridged from Enterprise Value by adjusting for the company's financing position and other agreed items.
Actual transactions may also involve normalised working capital requirements and other negotiated balance-sheet adjustments.
ValuBase currently estimates Enterprise Value. It does not calculate the amount ultimately payable for the shares in a transaction.
06 — When EBITDA multiples may not be appropriate
Not every business should be valued using an EBITDA multiple
An EBITDA multiple methodology may be inappropriate or require substantial professional judgement where:
- EBITDA is zero or negative
- the business is distressed
- asset value is the principal source of economic value
- the business is very early stage
- earnings are unusually volatile or unrepresentative
- significant restructuring or turnaround assumptions are required
Depending on circumstances, alternative methodologies may include asset-based valuation, net asset value, discounted cash flow or other specialist approaches. ValuBase does not perform these alternative valuation methods.
Applying this in ValuBase
How ValuBase applies these principles
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