A buyer values a business on two things: what it is expected to earn for them, and how confident they can be that it will. Every valuation method is a different way of putting a number on those two questions.
This guide sets out eight methods commonly used to value a private company in the UK, the formula behind each, and the steps that take a valuation from the profit in the accounts to the value of the shares. It then looks at why two businesses with the same profit can be valued very differently.
What are the three approaches behind every valuation method?
The International Valuation Standards published by the International Valuation Standards Council (IVSC) name three principal valuation approaches in IVS 103, Valuation Approaches (edition effective 31 January 2025):
- Market approach. Value is set by comparison with prices paid for similar businesses or shares.
- Income approach. Value is set by the future income or cash flow the business is expected to produce.
- Cost approach. Value is set by what it would cost to replace or reproduce the assets, less an allowance for wear and obsolescence.
Seven of the eight methods below sit within these approaches. Net asset value is closest to the cost approach when assets are restated to current values. Liquidation value is different: it is a basis of value that assumes the business stops trading. Valuers often work with more than one method, because each answers a slightly different question and the gaps between them show where the judgement lies.
What are the eight business valuation methods?
Earnings multiple (EBITDA multiple)
What it is: Profit before interest, tax, depreciation and amortisation (EBITDA), adjusted to show what the business can keep earning, multiplied by a figure that reflects risk and growth.
The formula: Enterprise value = maintainable EBITDA × EBITDA multiple
What it gives you: Enterprise value, the value of the whole business before debt and cash are taken into account.
Where it fits: Established, profitable private companies, where it is the most widely used method. The multiple itself is usually drawn from comparable transactions or quoted comparables, both covered below. The figure that matters is maintainable EBITDA, not the number in last year’s accounts. Buyers look closely at how adjusted EBITDA is worked out, because the multiple is applied to every pound of it.
What it misses: The multiple carries all of the judgement about risk. Two valuers can agree on EBITDA and still be far apart because they apply different multiples.
Price/earnings (P/E) ratio
What it is: Profit after tax multiplied by a price/earnings ratio.
The formula: Equity value = maintainable profit after tax × P/E ratio
What it gives you: Equity value, the value of the shares, because profit after tax is already after interest on any debt.
Where it fits: Valuing shareholdings, including minority stakes, and comparing with listed companies, for which P/E ratios are published.
What it misses: It is affected by how the business is financed and by one-off tax items, so two similar businesses with different levels of debt can show quite different P/E values.
Discounted cash flow (DCF)
What it is: A forecast of the cash the business will generate, with each future year’s cash discounted back to today at a rate that reflects risk.
The formula: Value = the sum of each year’s forecast free cash flow ÷ (1 + discount rate)^year, plus a terminal value for the years beyond the forecast, also discounted back to today
What it gives you: Enterprise value when the cash flows are before financing and the discount rate is the weighted cost of debt and equity.
Where it fits: Businesses with predictable cash flows, such as those with a large share of contracted maintenance or service income, and as a cross-check on multiple-based methods.
What it misses: The answer is sensitive to the discount rate and the terminal value. A small change in either moves the result a long way, so a DCF is only as good as the assumptions behind it.
Revenue multiple
What it is: Annual revenue multiplied by a revenue multiple.
The formula: Enterprise value = annual revenue × revenue multiple
What it gives you: Enterprise value.
Where it fits: Businesses where current profit does not reflect earning power, such as companies investing for growth ahead of profit, or where recurring revenue under contract is the main thing a buyer is paying for.
What it misses: Revenue says nothing about margin. Two businesses with the same turnover and very different profit will look the same under this method.
Comparable transactions
What it is: Value set by the prices paid in recent sales of similar private companies, usually expressed as a multiple of their EBITDA or revenue.
The formula: Enterprise value = the subject company’s EBITDA (or revenue) × the multiple paid in comparable deals, adjusted for differences in size, growth and risk
What it gives you: Enterprise value, grounded in what buyers have actually paid.
Where it fits: Sectors with regular private company deals, which include parts of building services and installation. Sector matters here: how an HVAC business is valued is affected by how much of its revenue comes from contracted maintenance.
What it misses: Private deal terms are often not published, and the headline price in a press release may include deferred or performance-linked payments. Comparisons need adjusting for those differences.
Quoted company comparables
What it is: Value set by the multiples at which similar listed companies trade on a stock exchange.
The formula: Value = the subject company’s earnings × the listed company multiple, reduced to reflect differences in size, diversification and how easily the shares can be sold
What it gives you: Enterprise value or equity value, depending on which multiple is used.
Where it fits: Larger private companies with listed peers, and as a reference point for the top end of a sector.
What it misses: Listed companies are usually far larger, more diversified and easier to trade than a private company. The adjustment for those differences is a judgement, and it often drives the result more than the listed multiple itself.
Net asset value (book value)
What it is: The company’s assets minus its liabilities, as shown on the balance sheet. An adjusted net asset value restates property, plant and stock at current market value.
The formula: Net asset value = total assets − total liabilities
What it gives you: Equity value.
Where it fits: Asset-heavy businesses, property and investment companies, and as a reference point alongside earnings-based values for trading businesses.
What it misses: Book values are accounting figures, and assets may not realise them. The value of a profitable trading business usually sits in its earning power, much of it in intangibles such as its brand, customer relationships and know-how, which do not appear on the balance sheet.
Liquidation value
What it is: What the assets would raise if the business stopped trading and they were sold, after paying all liabilities and the costs of closing down.
The formula: Liquidation value = realisable value of assets − all liabilities − costs of winding up
What it gives you: Equity value on a break-up basis.
Where it fits: Businesses in distress, lender security reviews, and as the lowest reference point in any valuation.
What it misses: It assumes the business has no future. For a business that is trading profitably, it is a floor, not a value.
How do the eight methods compare?
| Method | Approach | Gives | Main input |
|---|---|---|---|
| Earnings multiple (EBITDA) | Market | Enterprise value | Maintainable EBITDA |
| Price/earnings (P/E) | Market | Equity value | Maintainable profit after tax |
| Discounted cash flow | Income | Enterprise value | Forecast free cash flow and discount rate |
| Revenue multiple | Market | Enterprise value | Revenue |
| Comparable transactions | Market | Enterprise value | Multiples from similar private deals |
| Quoted company comparables | Market | Enterprise or equity value | Listed company multiples |
| Net asset value | Closest to cost (when restated) | Equity value | Balance sheet |
| Liquidation value | Break-up basis of value | Equity value | Realisable value of assets |
What are the steps to calculate a business valuation?
Whichever methods are used, a valuation follows the same broad steps.
- Set the purpose and the basis of value. A valuation for a sale, for tax, for a shareholder dispute or for selling to an employee ownership trust may use different bases. For capital gains tax, market value is defined in section 272(1) of the Taxation of Chargeable Gains Act 1992 as “the price which those assets might reasonably be expected to fetch on a sale in the open market” (HMRC Capital Gains Manual, CG16330); inheritance tax uses a similar definition. HMRC’s Shares and Assets Valuation Manual sets out how it treats the hypothetical open-market sale.
- Gather the financial information. Usually three years of accounts, current-year management accounts, a forecast and the order book. Filed accounts for other private companies, including competitors, can be found on Companies House, although many small companies file abbreviated accounts without a profit and loss account.
- Work out maintainable earnings. Reported profit is adjusted to show what a new owner would earn: owner pay restated at the cost of a replacement manager, one-off costs and income removed, and rents or other dealings with related parties restated at market rates.
- Choose the methods that fit. The choice depends on the purpose of the valuation, whether the business is profitable and stable, how much of its value sits in assets, and what market evidence exists.
- Apply the methods and compare the results. Where the methods give different answers, the reasons for the gap are part of the valuation.
- Move from enterprise value to equity value. Many sales, particularly to trade and private equity buyers, are priced on a debt-free, cash-free basis: the price starts from enterprise value, debt and debt-like items are deducted, and surplus cash is added. Where completion accounts are used, the price is also adjusted if working capital at completion is above or below an agreed normal level. Under a locked box mechanism, the price is fixed from an earlier balance sheet instead.
- Test the result against what a buyer will see. The multiple a buyer applies reflects the risks they find in due diligence, covered in the next two sections.
Illustrative example. The figures below are invented to show the arithmetic only. They are not a guide to the multiples any business would achieve.
| Step | Figure |
|---|---|
| Reported EBITDA | £900,000 |
| Add back one-off legal costs | + £60,000 |
| Deduct the extra cost of paying a replacement manager at market rate | − £40,000 |
| Maintainable EBITDA | £920,000 |
| Multiple applied (chosen for the example) | × 5 |
| Enterprise value | £4,600,000 |
| Less bank debt | − £500,000 |
| Add surplus cash | + £300,000 |
| Equity value | £4,400,000 |
Debt-like items and any working capital adjustment would also sit in this bridge; they are left out to keep the example simple.
Check your business: valuation inputs
- Could your accounts show maintainable earnings without a long list of one-off items to explain?
- Is the owner’s pay in the accounts close to what a replacement manager would cost?
- Do you know the normal level of working capital the business needs from month to month?
Why can two businesses with the same profit be valued differently?
The formulas above share one feature: the multiple, or the discount rate, carries the buyer’s view of risk and growth. Two businesses with the same maintainable EBITDA can be valued very differently because a buyer sees different levels of risk in each.
Alongside size, sector and market conditions, many of the factors that move the multiple are operational:
- Dependence on the owner. Whether the business wins work, manages jobs and keeps customers without the owner involved day to day.
- Recurring and contracted revenue. How much revenue comes from maintenance contracts, service agreements and repeat customers, and how well it is documented.
- Customer concentration. Whether the loss of one or two customers would take a large share of profit with it.
- Management depth. Whether there is a team that can run the business through and after a sale.
- Documented processes. Whether quoting, scheduling, purchasing and invoicing run the same way whoever is doing them.
- Quality of financial information. Whether monthly management accounts are timely, reconcile to the annual accounts and show margin by job or contract.
Each of these is something a buyer can test in due diligence, which is why operational improvements that increase business valuation tend to show up in the multiple rather than in the profit figure alone.
What do buyers adjust for in due diligence?
Due diligence is where the buyer tests the numbers behind the valuation, alongside operational due diligence on how the business runs. The main areas that change the price are:
- Quality of earnings. The buyer’s accountants rebuild maintainable EBITDA from the records, checking each adjustment the seller has made and looking for any the seller has not.
- Working capital. The buyer and seller agree a normal level of working capital, usually based on a monthly average. Where completion accounts are used, the price moves if debtors, stock and creditors at completion differ from that level.
- Debt-like items. Liabilities that are not bank debt but will cost the buyer cash, such as overdue tax, finance leases, unpaid bonuses and, in some deals, deferred income for work not yet done, are often negotiated as debt-like items and deducted from the price.
- Risks found. Issues with contracts, compliance, staff or key customers are dealt with through a lower price, a retention, a specific indemnity or a change to the deal structure.
Check your business: what a buyer would see
- Would revenue hold steady if the owner stepped away for three months?
- Can you show what share of revenue comes from contracted or repeat work, customer by customer?
- Could a buyer find written processes for quoting, scheduling and invoicing?
How does deal structure change the headline valuation?
The value agreed and the cash received at completion are not always the same. A headline price can be paid in several ways:
- Cash at completion. Paid on the day the sale completes.
- Deferred consideration. A fixed amount paid at agreed dates after completion.
- Earn-out. Payments that depend on the business hitting agreed targets after the sale.
- Vendor loan. Part of the price lent back to the buyer and repaid over time.
- Rollover equity. Part of the price taken as shares in the buyer or the new holding company.
Deferred and contingent payments carry risk for the seller, so two offers with the same headline price can be worth different amounts. These terms sit alongside the wider process of how buying and selling a business in the UK works.
What are the common mistakes when calculating a business valuation?
- Mixing enterprise value and equity value. Applying an EBITDA multiple and treating the answer as the price of the shares leaves out debt, cash and working capital.
- Using unadjusted profit. Last year’s reported profit can include one-off items and owner costs that a buyer will remove or add back.
- Applying listed company multiples directly. Listed multiples reflect size and liquidity that a private company does not have.
- Relying on one method. A single method gives no way of testing the result.
- Using out-of-date comparables. Deal multiples move with interest rates and buyer demand, so older transactions may not reflect today’s market.
- Treating an online calculator as a price. A calculator applies a formula to the figures entered. It cannot see the risks a buyer will find in due diligence.
Frequently asked questions
There is no single formula. For a profitable private company, the starting point is often enterprise value = maintainable EBITDA × EBITDA multiple. Debt is then deducted and surplus cash added to reach the value of the shares.
Enterprise value is the value of the whole business, before taking account of how it is financed. Equity value is what the shares are worth: enterprise value less debt and debt-like items, plus surplus cash, adjusted for working capital.
Maintainable earnings are the profits a new owner could expect the business to keep producing. They are reported profit adjusted for one-off items, owner pay at market rate and any dealings with related parties that are not at market rates.
For capital gains tax, market value is defined in the Taxation of Chargeable Gains Act 1992 as the price the assets might reasonably be expected to fetch on a sale in the open market, and inheritance tax uses a similar definition. HMRC’s Shares and Assets Valuation Manual explains how it applies this to shares in unquoted companies.
Earnings-based methods are the usual starting point for a profitable private business, with net asset value as a reference point and liquidation value as the floor. Where profit does not reflect earning power, a revenue multiple or discounted cash flow may be used alongside them.
A calculator applies a formula to the figures entered, so it can give a rough range. It cannot judge maintainable earnings or the risks a buyer will find, which is where much of the difference between valuations comes from.
Sources
- International Valuation Standards Council: International Valuation Standards (IVS 103, Valuation Approaches, para 10.01; edition effective 31 January 2025)
- HMRC: Capital Gains Manual, CG16330: Assets: principles of valuation: meaning of market value
- HMRC: Shares and Assets Valuation Manual, SVM113000: The Statutory Open Market
- Companies House: Find and update company information
Sources last checked: October 2026.
