Business Valuation: 6 Best Methods for Valuing a Company

Imagine this: you run a Leeds-based services business and a buyer says, “We pay 6× maintainable profit.” Sounds clean and simple—until you realise a single “small” adjustment changes everything. If your maintainable profit is £250,000, a 6× multiple implies £1.5m. But if your accounts include £20,000 of one-off legal costs that won’t repeat, your maintainable profit becomes £270,000 and the implied value jumps to £1.62m. That’s £120,000 of value movement from one line item.

This is why Business Valuation matters in real life: selling a business, bringing in investors, refinancing, succession planning, divorce proceedings, tax planning, or a shareholder dispute. The numbers don’t just sit in a spreadsheet—they shape negotiations, timelines, and (often) relationships.

Quick answer

Business Valuation is the process of estimating what a company is worth, using financial performance, assets, risk, and market evidence. You value a company by choosing an appropriate method (market value, multiples, cash flow, or asset-based), using reliable inputs, and making sensible adjustments for one-offs, debt/cash, and working capital. The “right” value depends on purpose and assumptions.

At-a-glance: the 6 Business Valuation methods compared

Before you pick a method: the key terms 

A lot of Business Valuation confusion comes from mixing up “what the business is worth” with “what you, the shareholder, walk away with”.

Enterprise value vs equity value

• Enterprise value (EV) = value of the whole business operations (available to both lenders and shareholders).
  
• Equity value = what’s left for shareholders after settling net debt and other equity-bridge items.
  

A common bridge is:

Equity value = Enterprise value − Net debt ± Working capital adjustment (and other completion items)

Deal pricing often starts at EV and then adjusts to equity value through a completion mechanism. This is a standard idea in UK corporate finance completion discussions.

EBITDA (defined)

EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation. In valuations, it’s used as a proxy for operating profit before financing and some non-cash accounting charges.

Net debt (defined)

Net debt usually means interest-bearing debt minus cash (sometimes adjusted for “surplus” cash). In practice, the definition can be negotiated. Guidance commonly describes net debt as long-term debt less surplus cash above working capital needs.

Working capital (defined)

Working capital is the money tied up in day-to-day trading: typically trade debtors + stock − trade creditors (often with VAT, accruals, and other items considered depending on the deal). It matters because a buyer expects a “normal” level of working capital to operate the business.

WACC (defined)

WACC = Weighted Average Cost of Capital. It’s the blended required return demanded by providers of capital (debt and equity), used as a discount rate in DCF.

Terminal value (defined)

Terminal value is the estimated value of the business beyond the explicit forecast period in a DCF—often a large part of the result—based on either a steady-growth assumption or an exit multiple.

Method 1) Market Capitalisation (for public companies)

For listed businesses, the market is constantly pricing the company based on available information, sentiment, and expectations. Market capitalisation is the value of the company’s equity as implied by the stock market.

Formula(s)

• Market capitalisation = Share price × Number of shares outstanding
  
• If you want an EV view (often useful):
  Enterprise value ≈ Market cap + Net debt (simplified)
  

Data you need

• Current share price
  
• Shares outstanding (from financial statements/market data)
  
• (Optional) net debt for EV perspective
  

When it works best / when it misleads

Works best when:

• The shares trade actively (tight bid/ask spread, decent volume)
  
• The market has good information and time to digest it
  

Misleads when:

• The price is distorted by short-term news, thin trading, or market-wide panic/euphoria
  
• You’re valuing control (a buyer might pay a premium to take over)
  

Worked UK-flavoured example 

Example: Person A is looking at a London-listed manufacturing group.

• Share price: £2.40
  
• Shares outstanding: 120,000,000
  

Market cap = £2.40 × 120,000,000 = £288,000,000

If the group has net debt of £60m, then a rough EV is:

EV ≈ £288m + £60m = £348m

Reality check

A single day’s market cap is a snapshot, not a verdict. If the company issues new shares, buys back shares, takes on debt, or the market moves sector-wide, the number can shift fast—without anything “fundamental” changing in operations.

Method 2) Times Revenue Method

The Times Revenue Method values a business as a multiple of revenue (turnover). It’s common where profits are depressed (or reinvested) but revenue is meaningful—think subscription businesses, marketplaces, or fast-growing firms.

It’s also used as a sense check alongside profit-based approaches.

Formula(s)

• Enterprise value = Revenue × Revenue multiple
  
• Sometimes it’s framed as equity value directly, but in deal contexts it’s usually an EV starting point, then you adjust for net debt.
  

Data you need

• Reliable revenue figure (e.g., last 12 months turnover, or ARR for subscription models)
  
• A defensible revenue multiple (based on sector evidence and quality factors)
  

When it works best / when it misleads

Works best when:

• Revenue quality is high (contracted, recurring, low churn)
  
• Gross margins are strong and scalable
  
• Comparable transactions support a revenue multiple approach
  

Misleads when:

• Revenue is “lumpy” (project-based) or heavily discounted to win sales
  
• Gross margin is thin (e.g., pass-through reselling)
  
• Customer concentration is high (one client = one headache)
  

Worked UK-flavoured example

Example: Person A runs a Manchester-based SaaS with £1.2m ARR and strong retention.

Assume a 4× revenue multiple (illustrative only).

EV = £1.2m × 4 = £4.8m

If the business has:

• Cash: £0.3m
  
• Debt: £0.9m
  Then net debt = £0.6m (debt minus cash, simplified)
  

Equity value ≈ £4.8m − £0.6m = £4.2m

Reality check

Revenue multiples are really a proxy for future profit and cash generation. Two businesses with the same turnover can have completely different values if one has 85% gross margin and the other has 25%.

Method 3) Earnings Multiplier / Profit Multiple

This is the workhorse of SME Business Valuation: value is calculated as a multiple of maintainable earnings.

You’ll hear variants like:

• EBITDA multiple (often used to estimate enterprise value)
  
• Profit multiple or P/E style multiple (often closer to equity value, depending on the definition used)
  

A common approach in transactions is:

1. Value the business on an EBITDA multiple to get EV
   
2. Deduct net debt (and apply working capital adjustments) to arrive at equity value
   

This EV-to-equity idea is widely described in professional valuation guidance.

Formula(s)

• Enterprise value = Maintainable EBITDA × EBITDA multiple
  
• Or: Equity value = Maintainable profit × Profit multiple (definitions vary)
  
• Then: Equity value ≈ EV − Net debt ± Working capital adjustment
  

Data you need

• A “clean” profit measure (ideally 3-year history + current year trading + forecast)
  
• Adjustments for one-offs and owner-specific items (see adjustments section below)
  
• A reasonable multiple (supported by comparable companies/transactions where possible)
  

UK data sources for private company multiples exist (often paywalled/member-only), and can provide sector-level context.

When it works best / when it misleads

Works best when:

• The business has stable, repeatable earnings
  
• You can justify “maintainable” earnings (not just last year’s profit)
  
• There’s market evidence for the multiple
  

Misleads when:

• Earnings are volatile or heavily dependent on one contract/person
  
• Profit is distorted by unusual costs, under/over-paid directors, or aggressive accounting
  

Worked UK-flavoured example 

Example: Person B runs a Birmingham manufacturing firm.

• Reported EBITDA (last year): £480,000
  
• Adjustments:
  
  • One-off equipment relocation cost: +£30,000
    
  • Owner’s salary above market: +£40,000 (i.e., add back the excess)
    
• Maintainable EBITDA = £480,000 + £30,000 + £40,000 = £550,000
  

Assume an EBITDA multiple of 5× .

EV = £550,000 × 5 = £2,750,000

Now adjust for net debt (simplified):

• Debt: £500,000
  
• Cash: £150,000
  Net debt = £350,000
  

Equity value ≈ £2.75m − £0.35m = £2.40m

Reality check

If a buyer argues that your “true” maintainable EBITDA is £500,000 instead of £550,000, at 5× that’s a £250,000 swing in EV. This method is simple—but it magnifies disagreements.

Method 4) Discounted Cash Flow (DCF)

DCF values a business based on the cash it can generate in the future, discounted back to today to reflect risk and the time value of money.

In practice, you:

1. Forecast free cash flows (cash available to capital providers) for a set period (often 3–5 years for SMEs)
   
2. Discount those cash flows using WACC
   
3. Add a terminal value to capture value beyond the forecast window
   
4. Convert EV to equity value by adjusting for net debt and other items
   

Formula(s)

• EV = Σ [FCFₜ ÷ (1 + WACC)ᵗ] + [Terminal value ÷ (1 + WACC)ⁿ]
  
• Common terminal value (steady growth / Gordon Growth):
  
  • Terminal value = FCFₙ₊₁ ÷ (WACC − g)
    where g = long-term growth rate (kept conservative)
    

Data you need

• A credible forecast (revenue, margins, tax, capex, working capital movements)
  
• A defensible WACC
  
• A terminal value method and assumptions
  

When it works best / when it misleads

Works best when:

• Cash flows are predictable (or you can model scenarios)
  
• You need to reflect changing performance (growth, investment, turnaround)
  
• You want to stress-test “what if” outcomes
  

Misleads when:

• Forecasts are optimistic without evidence
  
• Terminal value assumptions do the heavy lifting (quietly)
  
• The discount rate is guessed rather than reasoned
  

Worked UK-flavoured example

Example: Person A runs a Bristol-based engineering services firm with steady contracts.

Assume forecast free cash flows (FCF):

• Year 1: £220k
  
• Year 2: £240k
  
• Year 3: £260k
  
• Year 4: £280k
  
• Year 5: £300k
  

Assume:

• WACC = 12%
  
• Long-term growth g = 3%
  

Step 1: Discount the forecast cash flows (rounded)

• PV(Year 1) ≈ 220k / 1.12 = £196k
  
• PV(Year 2) ≈ 240k / 1.12² = £191k
  
• PV(Year 3) ≈ 260k / 1.12³ = £185k
  
• PV(Year 4) ≈ 280k / 1.12⁴ = £178k
  
• PV(Year 5) ≈ 300k / 1.12⁵ = £170k
  

PV of forecast period ≈ £920k

Step 2: Terminal value

• FCF₆ = 300k × 1.03 = £309k
  
• Terminal value = 309k / (0.12 − 0.03) = 309k / 0.09 = £3.43m
  
• PV of terminal value ≈ 3.43m / 1.12⁵ ≈ £1.95m
  

EV ≈ £0.92m + £1.95m = £2.87m

If net debt is £0.40m, then:

Equity value ≈ £2.87m − £0.40m = £2.47m

Reality check

DCF is brutally sensitive. If WACC rises from 12% to 13%, or terminal growth drops from 3% to 2%, your value can move materially. Treat the result as a range with scenarios, not a single “correct” number.

Method 5) Book Value 

Book value (often called Net Asset Value in this context) looks at what the business owns minus what it owes, based on the balance sheet.

For many trading SMEs, book value is not the same as “worth” because a strong business has intangible value (relationships, systems, brand) that doesn’t sit neatly on a balance sheet.

Statutory accounts in the UK include a balance sheet showing what the company owns and owes at year end.

Formula(s)

• Net Asset Value (NAV) = Total assets − Total liabilities
  
• Sometimes you adjust assets and liabilities to more realistic (“market”) values where appropriate.
  

Data you need

• Balance sheet (preferably detailed management balance sheet, not just filed abridged accounts)
  
• Understanding of asset quality and hidden liabilities (leases, warranties, disputes)
  

When it works best / when it misleads

Works best when:

• The business is asset-heavy (property, machinery, investment assets)
  
• You’re valuing a holding company or “balance sheet business”
  
• The company is barely profitable (assets provide a valuation anchor)
  

Misleads when:

• The real value is in people, IP, customer contracts, or brand (which may not be recognised)
  
• Assets are carried at historic cost and are outdated
  
• Liabilities are understated or off-balance-sheet
  

Worked UK-flavoured example 

Example: Person B owns a Sheffield-based logistics firm with vehicles and a warehouse.

Balance sheet (simplified):

• Assets: £1.80m
  
• Liabilities: £1.25m
  

NAV = £1.80m − £1.25m = £0.55m

Now, suppose the warehouse is in the accounts at historic cost, but a realistic market view suggests it’s worth £0.20m more.

Adjusted NAV ≈ £0.55m + £0.20m = £0.75m

Reality check

Book value often sets a floor, not a ceiling. A profitable business can be worth far more than NAV; an unprofitable asset-heavy business can be worth less if assets aren’t really realisable at their carrying values.

Method 6) Liquidation Value

Liquidation value asks: “If we shut the doors and sold the assets, what cash would be left after paying everyone?”

It’s typically used in distress, insolvency planning, or worst-case negotiation scenarios. It is not a going-concern valuation.

Formula(s)

• Liquidation value = Realisable value of assets − Liabilities − Liquidation costs
  

Data you need

• Asset list with realistic forced-sale values (not book values)
  
• Full liabilities picture (including redundancy, lease break costs, professional fees)
  

When it works best / when it misleads

Works best when:

• The business is distressed or winding down
  
• You need a downside case for lenders or stakeholders
  
• Assets are saleable and separable
  

Misleads when:

• The business could be sold as a going concern (often worth more)
  
• Assets are specialised and have few buyers
  
• Costs of closure are underestimated
  

Worked UK-flavoured example 

Example: Person A runs a Kent-based retail business that’s closing.

Assets (book cost vs forced-sale):

• Stock: cost £300k → forced-sale 30% = £90k
  
• Fixtures/fittings: book £120k → forced-sale £20k
  
• Van: book £18k → forced-sale £10k
  
• Cash in bank: £15k
  

Total realisable assets = 90k + 20k + 10k + 15k = £135k

Liabilities:

• Trade creditors: £80k
  
• VAT + PAYE arrears: £25k
  
• Loan: £40k
  

Total liabilities = £145k

Liquidation costs (insolvency/legal, redundancy admin): £20k

Liquidation value = £135k − £145k − £20k = −£30k

So, in this scenario, there’s no value for shareholders—and a shortfall exists.

Reality check

Liquidation value is highly sensitive to “what can you actually sell, and how fast?” If stock can be transferred to another site at full margin, liquidation value might be too pessimistic. If the lease has harsh exit clauses, it might be too optimistic.

Which Business Valuation method should you use?

Use this as a starting point—then triangulate with at least one cross-check.

1) Start with your purpose

• Selling / buying: multiples + DCF cross-check; consider working capital and net debt mechanics
  
• Raising investment: revenue multiple (if early) plus DCF/earnings narrative as the business matures
  
• Debt/refinancing: DCF and asset backing; lenders care about downside and cash cover
  
• Tax-related valuations: be careful—HMRC may scrutinise assumptions and supporting evidence, and has specialist valuation processes (including checks and negotiation routes).
  
• Shareholder dispute / divorce / succession: clarity and defensibility matter—document assumptions and consider more than one method
  

2) Match the method to the business type

• Public company: Market Capitalisation (then adjust to EV if needed)
  
• High growth / low profits (SaaS, early-stage): Times Revenue (but explain unit economics)
  
• Stable profitable SME: Earnings Multiplier / Profit Multiple (with clean adjustments)
  
• Predictable cash flows or changing performance: DCF
  
• Asset-heavy businesses: Book Value (adjusted) + earnings sanity check
  
• Distress: Liquidation Value (plus going-concern option if sale is possible)
  

3) Use ranges, not single numbers

Instead of “the value is £2.4m”, use “£2.2m–£2.6m depending on maintainable earnings and net debt definition”. Buyers and investors think in ranges anyway—you may as well lead the conversation with one.

Common adjustments accountants make

Most Business Valuation disagreements aren’t about the method—they’re about the inputs.

1) Normalisation adjustments 

You’re trying to answer: what profit would a typical owner achieve, going forward, under normal conditions?

Common examples:

• One-off legal fees, recruitment costs, flood damage repairs
  
• Exceptional bad debts
  
• A temporary spike in energy costs (treated carefully—don’t over-adjust)
  

Professional valuation guidance discusses removing one-off/exceptional items when using earnings multiples.

2) Owner’s salary and perks

Owner-managed companies often run through:

• Above/below-market director pay
  
• Personal vehicle costs, family travel, private medical, etc.
  

The valuation should reflect a commercial management cost:

• If you currently pay yourself £160k but a market MD would cost £110k, you might add back the £50k “excess” to arrive at maintainable earnings .
  

3) One-offs vs “recurring but hidden”

Be honest: some costs look like one-offs but repeat annually (e.g., “non-recurring” consultancy that happens every year). Buyers will spot patterns quickly.

4) Debt, cash, and the EV-to-equity bridge

Many deals price on EV and then adjust for net debt and working capital to land on equity value. Guidance often illustrates how net debt and working capital adjustments can change the equity outcome even when enterprise value looks similar.

Practical points:

• Agree what counts as “debt” (bank loans, HP/leases, director loans, overdrafts)
  
• Agree what cash is “surplus” vs needed for working capital
  
• Don’t forget VAT/PAYE balances when assessing net debt-like items
  

5) Working capital adjustments

Buyers typically expect the business to be delivered with a “normal” level of working capital so it can trade on day one.

If working capital is below normal at completion, equity value may reduce; if above, equity value may increase (depending on the deal’s completion mechanism).

UK-specific: where to find valuation inputs

Management accounts (best starting point)

• Monthly P&L, balance sheet, cash flow
  
• Customer-level revenue, margins, churn, pipeline
  
• Aged debtors/creditors and stock position
  

Limitation: management accounts are usually unaudited—so expect questions and clean-up work.

Statutory accounts (useful, but backward-looking)

UK statutory accounts must include a balance sheet and profit and loss account (plus notes), prepared under IFRS or UK GAAP, and are filed with Companies House and submitted to HMRC as part of company tax compliance.

Limitations to watch:

• They may be abridged for small/micro companies (less detail)
  
• They’re often many months behind current trading
  
• Accounting policies (e.g., depreciation) can distort comparability
  

Companies House filings (good for triangulation)

Filed accounts can help you sanity-check:

• Trends in turnover and profitability
  
• Balance sheet strength
  
• Share capital structure
  

Filing is a formal process and requires director approval.

Limitation: what you see publicly may be condensed, and not enough for a robust valuation on its own.

HMRC and tax-related context

If your Business Valuation is for a tax purpose (share schemes, CGT, IHT contexts, etc.), HMRC has specialist valuation teams and processes for checks and negotiations.
That doesn’t mean HMRC “sets” the value for commercial deals—but it does affect how carefully you document assumptions when tax is involved.

Mistakes to avoid 

1. Confusing enterprise value with equity value
   You can “agree” a headline multiple and still be miles apart after net debt and working capital.
   
2. Using last year’s profit as “maintainable” without adjustments
   A weird year (good or bad) needs normalising.
   
3. Picking a multiple because you saw it on a forum
   Multiples depend on sector, size, risk, margins, customer concentration, and growth.
   
4. Applying a revenue multiple to low-quality revenue
   Turnover that’s churny, discounted, or low-margin is not the same as contracted, high-margin recurring revenue.
   
5. Overbuilding a DCF and forgetting it’s only as good as the assumptions
   DCF is excellent for scenario thinking—but dangerous if it becomes a spreadsheet theatre show.
   
6. Ignoring working capital seasonality
   A June completion can look very different to a December one.
   
7. Relying solely on Companies House accounts
   Public filings are useful context, not the full operational picture.
   
8. Treating valuation as an exact number
   In practice, it’s a reasoned range with supporting evidence.
   

Key Takeaways

• Business Valuation is not one calculation—it’s a method choice + credible inputs + sensible adjustments.
  
• For SMEs, the earnings multiple method is common, but it’s only as strong as your “maintainable earnings” work.
  
• DCF is powerful for scenario planning, but highly sensitive to WACC and terminal value assumptions.
  
• Asset-based methods (book value and liquidation value) are essential for downside cases and asset-heavy businesses.
  
• In real deals, enterprise value to equity value adjustments (net debt and working capital) often decide the final outcome.
  

FAQs 

Summary for skim readers 

• Business Valuation is a structured estimate of what a company is worth—not a single magic formula.
  
• Public companies can be valued quickly via Market Capitalisation (share price × shares).
  
• Revenue multiples help when profits don’t yet tell the story—but only if revenue quality is strong.
  
• Earnings multiples (EBITDA/profit) are common for UK SMEs and hinge on “maintainable” earnings.
  
• DCF values future cash flows and is highly sensitive to WACC and terminal value assumptions.
  
• Book value is useful for asset-heavy firms; liquidation value is a downside case for distress.
  
• Always bridge from enterprise value to equity value using net debt and working capital.
  
• Use ranges and cross-checks, not one number taken out of context.
  

A practical next step

If you need a Business Valuation for a sale, investment, refinancing, succession, or a shareholder situation, Bloom Financials can help you build a defensible valuation range, backed by clean adjustments and clear assumptions—so you can negotiate from a position of confidence.

Disclaimer

This article is general information for UK readers and is not financial, tax, legal, or investment advice. Valuations depend on facts, assumptions, and purpose. Always take professional advice for your specific circumstances.

Sources (high-trust references)

• HMRC Shares and Assets Valuation Manual (overview of HMRC valuation context).
  
• HMRC guidance on Shares and Assets Valuations and valuation checks/negotiation process.
  
• GOV.UK guidance on preparing statutory accounts (what they include and who receives them).
  
• GOV.UK guidance on filing annual accounts with Companies House (process and requirements).
  
• ACCA Technical Factsheet 167 (valuation approaches, multiples, normalisation, EV/net debt concepts).
  
• ICAEW resource on UK private company multiples (availability of transaction multiples data).