How to value a business

There is no single number. There is a range, a set of assumptions that produce it, and a conversation about which of those assumptions a buyer will accept. Everything below is about getting to that range in a way you can defend six months later.

#Step 1 — Decide which earnings figure you are valuing

Not turnover. Not net profit. Almost always some version of operating earnings.

For businesses under roughly €1M of turnover where the owner works in the business full time, that figure is usually SDE — seller's discretionary earnings, which leaves the owner's compensation in. Above that, and for anything with a management layer, it is EBITDA, which takes owner compensation out at market rate.

Getting this wrong is the most common error in the whole exercise, because SDE and EBITDA differ by the entire owner's salary and the multiples applied to them are not interchangeable. SDE vs EBITDA covers the choice.

#Step 2 — Normalise it

Restate the earnings as they would look under a new owner. Strip out what leaves with you, add back what a buyer would not incur.

• Owner compensation above or below a market rate for the work actually done
• Genuine one-offs — a legal settlement, a relocation, a failed launch
• Non-operating costs: the vehicle nobody drives for the business, personal insurance
• Related-party rent above or below market
• Discontinued product lines the buyer will not inherit

Three years, not one. A single strong year invites the question of why you are selling now, and the answer had better not be because this year was unusual.

#Step 3 — Apply more than one method

Any one method is an opinion. Three methods that disagree tell you where the argument will be.

The multiple method is where most SME transactions actually land. EBITDA multiple explained covers what sets yours; DCF valuation explained covers when discounting is worth the effort.

#Step 4 — Find your multiple honestly

Sector averages are the starting point and nothing more. Yours moves from that average based on things a buyer can verify in an afternoon: size, growth, customer concentration, how much of the business runs without you, and how much revenue is contracted rather than hoped for.

Under €500k EBITDA

2–4×

owner-dependent, thin buyer pool

€500k – €2M

4–6×

management layer, broader pool

Above €2M

5–8×

institutional buyers enter

Those bands are directional, not a promise. A €400k-EBITDA business with 80% contracted revenue and no owner dependence can beat a €1.5M business that lives on one customer.

#Step 5 — Adjust from enterprise value to what you receive

The multiple produces enterprise value — what the operating business is worth, debt-free and cash-free. What lands in your account is different.

Enterprise value

€2,400,000

5× normalised EBITDA

Less debt

−€380,000

loans, leases, tax owed

Plus surplus cash

+€120,000

above the working capital peg

Equity value here is €2.14M — before advisory fees and before tax. Owners who negotiate hard on the multiple and ignore the working capital peg routinely give back more than they won.

#Step 6 — Stress the assumptions

Change one variable at a time and see what moves. If a single percentage point on the discount rate swings your range by €400,000, that assumption is where the negotiation will happen, and you should know its defence before a buyer finds it.

#Step 7 — Write it down

Not for the buyer. For you, in six months, when someone asks why you used a 12% discount rate and you cannot remember. The valuation that survives negotiation is the one whose workings are still legible when the conversation gets difficult.

Common valuation mistakes covers what usually goes wrong from here, and what buyers look for covers how the other side reads the same file.