What's a small business worth?
Lesson 12 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: Kettle & Co has EBITDA of £80,000. A buyer applies a multiple of 4, giving an enterprise value of £320,000. It has a £70,000 loan and £30,000 cash. What's the equity worth to Bev?
For a tiny owner-run business, buyers often use 'seller's discretionary earnings' (SDE) instead. A florist makes £30,000 profit after paying the owner a £25,000 salary. What's the SDE?
Quick facts
- Customers on long contracts that keep renewing → Higher multiple. Predictable income is worth more.
- The business falls apart if the owner leaves → Lower multiple. A buyer is paying for something that might walk out the door.
- Profits growing steadily for several years → Higher multiple. A track record of growth supports a higher multiple.
- One customer makes up most of the sales → Lower multiple. If that customer leaves, so does the business.
- Fact: “Valuation multiples vary a lot by sector, size and risk.” — There's no single 'standard' multiple. Small, owner-dependent firms usually get lower ones.
- Myth: “A revenue multiple on a loss-making startup is a fact, not a judgement.” — It's a story about the future that someone has to believe. Revenue isn't profit.
- Fact: “Two businesses with the same EBITDA can be worth different amounts to their owners.” — Different debts, cash and risks change both the multiple and the equity value.