Valuation is not a formula, it is a negotiation grounded in evidence. Here is how buyers really think — and how you shift the numbers in your favour.
Founders ask us this a lot: what's my business actually worth? The honest answer is that it isn't a number you can look up. It's a range, shaped by evidence, comparable transactions and negotiation. But the range is not arbitrary — buyers have a fairly predictable way of building it, and once you understand the mechanics you can move both ends of it deliberately.
How buyers actually build the number
For most UK SMEs — trading businesses with three or more years of profitability — the starting point is normalised EBITDA multiplied by a sector-appropriate multiple, then adjusted for net debt and working capital. That's the base formula. Everything else is a discussion about what belongs in EBITDA, and what the multiple should be.
Normalised EBITDA — the honest one, not the flattering one
"Normalised" means EBITDA after removing one-off items (a bad debt, a settled dispute, an aborted acquisition) and after adjusting founder-related economics to a market-rate arm's length position. A founder paying themselves £30k and taking the rest in dividends will see their EBITDA adjusted down by the difference between that salary and what an external CEO would cost. A founder paying themselves £400k plus benefits will see it adjusted up.
The mistake we see most often is founders (or their accountants) building a wildly optimistic add-back schedule, and then losing credibility on every other number in the room the moment the buyer's advisor pokes it. A defensible EBITDA — evidenced, not asserted — is worth far more than a maximised one.
Multiples — the range, and what moves them
Multiple ranges vary meaningfully by sector, size and quality. As a very rough map for UK SMEs in the £1m–£10m EBITDA band:
- Traditional services with mixed contract quality: 3–6× normalised EBITDA.
- Recurring-revenue B2B services / niche software-adjacent: 6–10×.
- True SaaS with real net retention: 3–8× ARR, not EBITDA — a different game.
- Sub-scale, owner-dependent, cyclical: 2–4×, if a sale is possible at all.
Those bands move. Within a sector, the difference between the low end and the high end is usually one or two specific characteristics — and those characteristics are the ones you can, over eighteen months, deliberately build in.
The multiple is not paid for the past. It's paid for the future the buyer believes they've bought.
The levers that actually move both
1. Recurring or contracted revenue
The single biggest driver in most SME transactions. Buyers treat contracted revenue as far higher quality than repeat but non-contracted revenue, and pay accordingly. Even partial conversion — from ad-hoc to annual contract — meaningfully moves the number.
2. Customer concentration
One customer above 15–20% of revenue caps multiples fast. Two customers above 15% caps them harder. If concentration is the constraint, spend a year building three evenly-sized clients rather than chasing one more elephant.
3. Gross margin and its trend
A business with 45% and rising gross margin is worth materially more than the same business flat at 45%. Trajectory is priced. Small, defensible price rises with clean margin flow-through are among the most valuable eighteen months of work an SME can do.
4. Founder-independence
Buyers do not pay premium multiples for jobs. If the business would notice you being away for a month, work on it. If it wouldn't, congratulations — you've built an asset. Our piece on making yourself redundant on purpose covers the mechanics.
5. Management team depth
A capable second-line — a real CFO or FD, a real COO, a real sales leader — signals to a buyer that they can run the business post-completion without you. That's often worth a full turn on the multiple.
Net debt, working capital and the small print
Headline EV is what everyone talks about. Cash at completion is what actually lands in your account, and it depends heavily on two mechanical items: net debt and the working-capital peg. Both are negotiated late in the process and both can move by six or seven figures. Get a corporate finance advisor who takes them seriously — and a good SPA lawyer who understands the interaction.
Deal structure matters as much as headline
A £10m offer with 60% cash at completion and a 40% three-year earn-out tied to performance you can't control is not a £10m deal. It's a £6m deal with a lottery ticket, and often a job. When comparing offers, model the cash mix, the earn-out structure, roll-over equity terms and the required post-completion role — not just the top-line number.
A useful working number
For most owners, a reasonable early estimate is: three-year average normalised EBITDA × the middle of your sector's multiple range, minus net debt, plus surplus cash. Treat that as a floor of the plausible range, not a promise. Then look at what would need to be true — recurring revenue mix, customer spread, margin trend, management depth — to justify the top of the range instead.
If you'd like a proper look at where your business sits today, our Exit & Succession practice starts with exactly that question.
Written by the Danicwin Team.
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