Methodology

Our Approach

Valuation Labs uses five ICAEW-standard valuation methods to produce comprehensive business valuation reports for UK SMEs. Rather than relying on a single approach, we select and blend the methods most appropriate for your business type, sector, and financial profile.

Each method provides a different perspective on value. By combining multiple approaches, we produce a valuation range — expressed as Floor, Reasonable, and Aspirational estimates — that gives you a well-rounded picture of what your business is worth. To see how the process works from start to finish, visit our step-by-step guide.

1. Earnings Basis (EBITDA Multiple)

The earnings basis is the primary method for valuing profitable UK SMEs. It calculates enterprise value by multiplying your normalised, weighted-average EBITDA by a sector-specific multiple.

Before applying the multiple, we normalise earnings by adjusting directors' remuneration to market rate and removing one-off items such as restructuring costs or exceptional gains. This produces a “maintainable EBITDA” figure that represents the ongoing earning power of the business.

When it's most appropriate: This is the standard method for established, profitable businesses with at least two to three years of trading history. It is the most widely used approach by accountants and business brokers across the UK.

2. Revenue Multiple

The revenue multiple method values a business as a multiple of its annual turnover. While less precise than earnings-based approaches for profitable companies, it provides a valuable cross-check and is particularly relevant for high-growth businesses where profitability may not yet reflect the company's true potential.

Revenue multiples vary significantly by sector. Technology and SaaS businesses with significant recurring revenue can command multiples of 3-8x annual recurring revenue (ARR), while traditional sectors such as construction or retail typically trade at 0.3-0.8x total revenue.

When it's most appropriate: Best suited for high-growth companies, pre-profit businesses, or sectors where revenue quality (such as recurring subscription income) is a better indicator of value than current earnings. Also useful as a secondary validation method alongside earnings-based valuations.

3. Net Assets

The net assets approach values a business based on the balance sheet, taking total assets less total liabilities and adding goodwill where applicable. This method establishes a floor value — the minimum a business should be worth based on its tangible and intangible assets.

We apply a ±25% guardrail to blend net assets with other methods. If the earnings-based valuation falls more than 25% below net assets, the blended value is adjusted upwards to reflect the asset base. This prevents undervaluation of asset-rich businesses.

When it's most appropriate: Essential for property-holding companies, asset-heavy manufacturers, and businesses where earnings are minimal or volatile. Also used as a floor check for all valuations.

4. Discounted Cash Flow (DCF)

The DCF method is the most theoretically rigorous approach. It projects your company's future free cash flows (FCFF) over a forecast period of 3 to 10 years, then discounts them back to present value using a Weighted Average Cost of Capital (WACC). A terminal value captures the business's worth beyond the explicit forecast period.

You can provide year-by-year financial projections or let our engine extrapolate from a growth rate. The DCF method is sensitive to assumptions about future growth, margins, and discount rates, which is why our reports include sensitivity analysis showing how changes in WACC and growth rate affect the valuation.

When it's most appropriate: Ideal for businesses with predictable cash flows, clear growth plans, or where a buyer would value the company based on its future earning potential. Commonly used for larger SMEs and businesses seeking investment.

5. Dividend Discount Model (DDM)

The DDM is a two-stage model that values a shareholding based on expected future dividend payments. It discounts projected dividends over an explicit forecast period, then adds a terminal value representing all dividends beyond that period. The discount rate used is the cost of equity, calculated via CAPM.

This method is particularly relevant for minority shareholders whose return comes primarily through dividend income rather than control or capital appreciation. The model accounts for dividend growth during the forecast period and a sustainable long-run growth rate for the terminal value.

When it's most appropriate: Best suited for valuing minority shareholdings (under 50%) in companies with a consistent track record of paying dividends. Not appropriate for companies that reinvest all profits or have irregular dividend histories.

Sector Multiples Reference

The table below shows indicative private company multiples by sector. These are derived from UK public company data with a 25-50% discount applied for private company marketability and liquidity factors. Actual multiples depend on company size, growth, profitability, and risk profile.

Source: UK SME market data 2024. Multiples are indicative ranges for private companies. Public company multiples are typically 25-50% higher before marketability and liquidity discounts.

Key Adjustments

Regardless of the valuation method used, we apply several adjustments to ensure the result reflects the true economic value of your business:

Value Drivers

Several factors influence where your multiple sits within the range:

• Growth trajectory — Consistent growth commands higher multiples
• Customer concentration — Diversified customer base reduces risk
• Recurring revenue — Predictable income is valued higher
• Market position — Strong competitive advantages increase value
• Owner dependency — Businesses less reliant on owners are worth more

Frequently Asked Questions