Business valuation model

There’s no right or wrong answer to how much a business is worth. Ultimately, a business is worth what someone else will pay. However, there are some basic rules of thumb to help you to calculate an indicative range of values.

The asking price

You can quickly check whether it’s worth bidding for a competitor’s business (or value your own) by using our Business Valuation Model. But before you make (or accept) a formal offer, please seek professional advice.

You’ll need at least the last three years’ audited accounts and current year’s budgets and management accounts. The price will usually be a multiple of recurring turnover, fees or profits after tax (depending on your sector), and these can be adjusted for balance sheet items (adding some asset values or subtracting certain liabilities).

Step 1. Take an average of two or three years’ historic turnover, fees or profits after tax, after making your own adjustments to profit.

The seller may have made adjustments for exceptional items and investments, so check whether these are reasonable. If the current owners pay themselves with dividends and they expect to stay in the business post-sale, don’t forget to adjust your profit calculations to account for the cost of employing them.

Step 2. There will usually be a range of multiples, appropriate to your sector, to be applied against turnover, fees or profits after tax. Use high, low and mid-points to calculate a range of multiplier values. Profit multiples usually range from three to ten times adjusted profits.

Step 3. Adjust the multiplier values for balance sheet items, for example, adding excess cash and subtracting loans.