What is my company worth? How a business is valued for sale

Three approaches to valuation

Buyers usually compare three approaches. For mid-market companies, the most common starts with an earnings multiple, usually based on EBITDA, observed at listed peers and in sector transactions. The second discounts expected future cash flows. The third, used for asset-heavy companies, looks at what the assets are worth.

These methods produce a range. In a sale process, give buyers good reasons to offer a price near the top of it.

Start with normalised EBITDA

Reported profit rarely reflects what the business will earn under a new owner. Before applying a multiple, normalise EBITDA for items that will not recur after the sale.

• Owner salaries that are above or below a market rate for the role.
• One-off costs or income, such as a legal dispute, a grant or the sale of an asset.
• Transactions with related parties, such as rent paid to a company the owner also controls.
• Costs the buyer can remove and that you can support with evidence.

Document every adjustment. Buyers and their due diligence teams will check each one. An adjustment you cannot support can undermine confidence in the rest of the figures.

From enterprise value to what you receive

A multiple gives an enterprise value, the value of the business before financing. What the shareholders receive is the equity value: enterprise value minus net debt, minus debt-like items such as unpaid taxes or deferred liabilities, plus or minus an adjustment if working capital at closing differs from a normal level agreed in advance.

Negotiations often continue over these adjustments after the headline price is agreed. Agree early on how to measure net debt and normal working capital to protect the price you negotiated.

What moves the multiple

Two companies with the same EBITDA can sell at very different multiples. Buyers look for the following.

• Visible growth supported by a credible plan and a pipeline of opportunities.
• A diversified customer and supplier base, with limited reliance on any one relationship.
• A management team that can run the company without relying on the founder for every decision.
• Recurring or contracted revenue beyond one-off projects.
• Clean, timely financial information that holds up under due diligence.

Before you ask anyone for a number

An independent valuation well before a sale helps you decide what to improve, how your expectations compare with market prices and whether the time is right to sell. It also gives you a benchmark for judging an offer.