Ask an owner what their business is worth and you usually get a number derived from turnover, from something a competitor supposedly sold for, or from what they need in order to retire. Ask a buyer and you get a completely different calculation, built from the profit the business will produce once the current owner has gone.
The gap between those two numbers is where most small business sales fall apart, months in, after both sides have spent money on advisers. It is worth understanding the buyer's arithmetic long before you ever intend to sell, because most of what raises the number takes two or three years to put in place.
Three ways to put a number on it
Multiple of adjusted profit. The dominant method for a trading business. Work out the sustainable annual profit, then apply a multiple that reflects how risky and how transferable that profit is. Everything else in a negotiation is really an argument about one of those two inputs.
Asset-based. Add up what the business owns, subtract what it owes. This sets the floor. For a business with plant, vehicles, property or serious stock it can be the higher number, and for a loss-making business it is often the only number. A profitable service business with a laptop and a client list will always be worth more than its assets.
Discounted cash flow. Project future cash flows and discount them back to today. Intellectually the purest method and the one most often used to justify a number somebody had already decided on. It suits businesses with long contracted revenue; it is close to meaningless for a business whose forecast beyond next year is guesswork.
Adjusted profit is where the real argument happens
Nobody buys your reported profit. They buy what the profit would have been under a normal owner, which means adding back the things that are really about you and taking off the things you have quietly stopped paying for.
Take an illustrative agency with £480,000 of revenue and £90,000 of profit after the owner has drawn a £70,000 salary. The owner adds back the salary and calls it £160,000. The buyer adds back the salary, then deducts £55,000 for the manager they will have to hire to do the work the owner did, adds back a genuinely one-off £12,000 legal cost, and deducts £8,000 because the van and the phone contracts were never in the accounts at market rate. Adjusted profit lands at £109,000, not £160,000.
Apply an illustrative multiple of three to each and the two sides are £480,000 apart before anyone has discussed the multiple itself. That is not bad faith. It is two people using the same method on different definitions of profit, which is why the add-backs get negotiated line by line and why clean, defensible accounts are worth real money.
Every hour a buyer spends untangling your figures is an hour they spend deciding the business is riskier than they thought. Risk comes off the multiple, and the multiple is the whole price.
The owner discount nobody mentions
Here is the uncomfortable part. The more essential you are, the less the business is worth. If the relationships are yours, the pricing decisions are yours, the quoting is yours, and the best clients would follow you out of the door, then a buyer is not buying a business. They are buying a job with a handover risk attached, and they will price it accordingly or structure the deal so most of the money depends on you staying.
Client concentration compounds this. A business where one customer is 40% of revenue carries an obvious single point of failure, and buyers either discount heavily for it or carve that revenue out of the guaranteed price entirely. The uncomfortable version of this is set out in the client we should have sacked two years earlier — the concentration that felt like security while you had it.
What raises the multiple, what kills it
Recurring or contracted revenue raises it more than anything else, because it converts a forecast into an obligation. Documented processes raise it. A management layer that runs the business without you raises it. Diversified customers raise it. Clean, timely accounts raise it, mostly by removing reasons to doubt everything else.
What lowers it: dependence on the owner, customer concentration, unresolved legal or employment disputes, informal arrangements with staff or suppliers that nobody wrote down, key contracts with change-of-control clauses, and any pattern in the numbers that requires an explanation. The same qualities investors screen for are covered in what investors actually look for before they write a cheque, and the reason is identical: both are pricing the risk that the profit does not survive the transaction.
Earn-outs: the part of the price you might never see
Very few small business sales are all cash on completion. The common structure is a proportion up front, a proportion deferred over one to three years, and a proportion contingent on the business hitting agreed figures after the sale.
So the headline price and the money that reaches your bank account are different things. If a £600,000 deal is £350,000 on completion and £250,000 contingent on profit targets over two years while you work under someone else's decisions, the honest description is a £350,000 sale with an uncertain bonus attached. Negotiate the earn-out terms — what counts as profit, who controls the cost base, what happens if the buyer redirects work elsewhere — with more care than the headline number. Owners consistently do the reverse, and what happens in the first 90 days after you sell is where they find out why that was the wrong emphasis.
What to actually do with this
If a sale is years away, this is still the most useful lens you have on your own business. Reduce your indispensability. Get more revenue under contract. Fix the customer concentration while you have time rather than while a buyer is looking at it. Keep the accounts clean and the arrangements written down.
Do those four things and the valuation looks after itself, because you will have built a business that produces profit without you — which is the only thing anyone was ever paying for.
Common questions
What multiple of profit do small UK businesses sell for?
There is no single figure, and any number quoted without reference to a specific sector and business is worth ignoring. The multiple reflects how transferable and how reliable the profit is: recurring contracted revenue with a management team in place commands a materially higher multiple than owner-dependent project work in the same sector. Rather than anchoring on a rumoured number, work out your adjusted profit honestly, then ask a corporate finance adviser or a broker active in your sector what comparable businesses have actually completed at recently. Completed deals matter, not asking prices, which are frequently aspirational and often never achieved.
Is turnover a reasonable way to value a business?
Only in specific sectors where profitability is highly predictable from revenue — recurring-revenue software and some professional practices such as accountancy fee blocks are the usual examples. For most businesses turnover tells a buyer almost nothing about what they will earn, because two firms with identical revenue can have completely different margins, cost structures and owner dependence. A revenue multiple is a shortcut that works where margins are standardised across an industry. Everywhere else, valuing on turnover produces a number that flatters busy, low-margin businesses and undervalues small, highly profitable ones.
Should I get a formal valuation before selling?
It depends what you need it for. For an actual sale, formal valuations carry little weight in the negotiation — the price is set by what a buyer will pay and how they structure it, not by a report. Where a valuation genuinely matters is where a number has to be defensible to someone other than a buyer: share transfers between shareholders, divorce proceedings, probate, HMRC valuations for share schemes, or a shareholders' agreement that prices an exit. In those cases pay for a proper one from someone who will defend it. For a market sale, spend that money on preparing the business instead.
How long before selling should I start preparing?
Two to three years is realistic if you want the preparation to show up in the price. Buyers typically look at three years of accounts, so changes made in the final months appear as a suspicious late improvement rather than a trend. The work that raises value takes time: building a management layer, converting ad hoc work into contracted revenue, reducing customer concentration, documenting processes and cleaning up informal arrangements. Preparation also reduces the chance of the deal collapsing in due diligence, which is where a meaningful share of small business sales die after both sides have already spent money.
