How is a business valued?

Most owners have a figure in mind, and it’s usually based on what they need from the sale rather than what a buyer will pay. Buyers work it out a different way, and knowing how helps you price your business so it sells.

It starts with adjusted profit

Buyers want to know what the business really earns for its owner. So we start with the net profit in your accounts and add back your own drawings or salary, personal costs that run through the business, and one-off costs that won’t happen again. The result, often called adjusted net profit, is the figure a buyer can expect to take home.

Then a multiple for your sector

That profit is multiplied by a number that reflects how much a buyer is prepared to pay for it. The multiple is higher where demand is strong, the income is steady and the business will run well without you, and lower where it depends on the owner, a single customer or a short lease. Each sector has its own range; see how it works for convenience stores. Where the property is included, its value is added separately.

What moves the price up or down

• Sales trend over three years. Steady or rising takings support a better price; a falling trend makes buyers cautious.
• How much the business relies on you. Trained staff and simple systems reassure a buyer that the business will carry on after you leave.
• Lease length and rent. Several years left at a fair rent helps a buyer’s finance; a short or expensive lease holds the price back.
• Location and competition. Footfall, parking and nearby competitors all affect how secure the income looks.
• Inspection ratings, for regulated sectors. In care, childcare and food, a good rating from the regulator adds real value.

Common mistakes

Pricing high to leave room for negotiation usually puts buyers off before they ask a question. Accounts that are late or mixed up with personal spending make the profit hard to prove. And telling staff or customers too early can unsettle the business before a buyer is found.