How to Value a Small Business: A Simple Guide for UK Buyers

The short answer to how to value a small business is this: work out the profit it really makes for an owner, then multiply that figure by a number that reflects how safe and transferable that profit is. For owner-run UK businesses such as takeaways, cafés, shops and salons, that multiple is often somewhere around one to three times adjusted profit. It varies a lot by sector, location and lease, so treat it as a starting point, not a rule. Stock is usually added on top.

How to value a small business: the basic method

Brokers and buyers of small businesses mostly use the same three steps:

1. Find the maintainable profit. This is the profit a new owner can realistically expect each year, not the best year on record.
2. Apply a multiple. A lower multiple for riskier businesses, a higher one for steadier, well-run ones.
3. Add or adjust for stock and assets. Stock is normally paid for separately on the day of completion.

Then sense-check your figure against similar businesses. Browsing businesses for sale in the UK in the same sector and area shows you what sellers are asking, though asking prices are not the same as sale prices.

What counts as profit when you value a business?

Start with net profit from the last two to three years of accounts. Then adjust it so it shows what the business earns for one working owner.

Add back costs a new owner would not have:

• The current owner's salary, dividends or pension contributions
• One-off costs, such as a new roof repair or a legal dispute
• Interest on loans the seller will clear before the sale
• Personal expenses run through the business, such as a family car
• Depreciation (but remember equipment will eventually need replacing)

Take off costs the seller has been avoiding:

• Wages for unpaid family members who help out
• A manager's salary if you will not work in the business full time
• Any known rent increase at the next rent review

As a simple illustration, a café showing £30,000 net profit, with £5,000 of one-off refit costs added back and £8,000 deducted for a spouse who works unpaid, has adjusted profit of £27,000. That is the number you multiply, not the £30,000.

What multiple should a small business sell for?

The multiple is a judgement about risk. Ask yourself how likely the profit is to continue once the current owner walks away.

Pushes the multiple up	Pushes the multiple down
Long lease with reasonable rent	Short lease or a big rent review due
Staff run day-to-day operations	Owner works every shift
Sales steady or growing over three years	Sales falling year on year
Many regular customers	One or two customers make up most sales
Clean accounts that match bank statements	Cash takings that are hard to verify

A business that relies entirely on the owner's personal skills or relationships sits at the bottom of the range, because much of what you are paying for may leave with them.

Stock, equipment and goodwill: how they fit into the price

Adverts often say "£X plus SAV", meaning plus stock at valuation. The stock is counted on completion day and paid for at cost price. Make sure you only pay for stock that is saleable, not out-of-date or damaged goods.

Fixtures, fittings and equipment are usually included in the main price. Check which items are owned and which are on finance or lease, because leased equipment is not the seller's to sell.

Goodwill is the part of the price above the value of the physical assets. If a business makes little or no profit, there is little goodwill to pay for, and the price should be close to the value of its assets. If the property is freehold, it should be valued separately by a surveyor.

Red flags that should lower your offer

• "Real takings are higher than the accounts." You can only safely pay for declared profit. Undeclared income is also a tax problem with HMRC that you do not want to inherit.
• Accounts that do not match VAT returns or bank statements.
• Only a few years left on the lease, or a landlord who has not confirmed consent to assignment.
• Profit that only exists because the owner works seven days a week without paying themselves.
• Recent sales spike just before the business was put up for sale.

Documents to request before you make an offer

Ask the seller for:

1. The last three years of accounts
2. VAT returns for the same period
3. Business bank statements, ideally for at least 12 months
4. Management accounts for the current year to date
5. A copy of the lease and any rent review history
6. A staff list with roles, pay and contracts
7. Recent supplier invoices
8. A list of equipment showing what is owned and what is financed

Have an accountant check the figures and a solicitor review the lease before you commit to a price. If you are an owner thinking of selling, the same logic applies: prepare these documents early, work out your own adjusted profit honestly, and you can then list your business for sale free with an asking price you can defend.