How to Value a Business

How to Value a Business

Thinking of buying a business? Selling one? Trying to impress your bank manager or your nan? Whatever your reason, working out how to value a business is a bit of a dark art. It’s not just a matter of what’s in the till or how nice the office plants look. Let’s unpack what “valuing a business” really means, how it’s done, and whether it’s more science or sorcery.

What Does “Business Valuation” Actually Mean?

Valuing a business is simply putting a price tag on it — what it’s worth today if you were to sell it, buy it, or use it as collateral to convince someone you know what you’re doing. But it’s not like pricing up a car on Auto Trader. You’re trying to measure not just what a business owns, but how well it makes money, how steady that money is, and what the future might look like.

In short, you’re answering the question: If I had to buy this business tomorrow, how much should I reasonably pay without feeling like a complete mug?

How Does Business Valuation Work?

There are a few common approaches, and none of them involve sticking a finger in the wind — at least not officially. Most UK valuations boil down to one (or a mix) of these:

Asset-based valuation: You add up everything the business owns (buildings, stock, machines, even trademarks), then subtract what it owes. Simple in theory, but it works best for companies with a lot of physical assets — not so great if all you’ve got is a laptop, a website, and a dream.

Income-based valuation: This one’s about profit — either what the business made last year, or what it’s expected to make in the future. Common methods include EBITDA (earnings before interest, taxes, depreciation and all the other boring bits), and discounted cash flow, which involves forecasting future cash and then squashing it down to today’s value like an accountant’s version of time travel.

Market-based valuation: This is the “what are others paying for similar stuff?” approach. It looks at what similar businesses sold for, much like checking how much three-bed semis go for in your area. Problem is, not every business has a good comparison, especially if you’ve got something weird or niche.

Each method has its place — and its problems. Most serious valuations mix and match to get a sensible range.

Understanding the Methods

Asset-based makes sense for factories, property firms, or companies winding down.
Income-based suits businesses with healthy profits and good prospects.
Market-based works best when there's enough market data to compare against.

Also worth noting: valuation isn’t just numbers — it includes perception. If your business has a strong brand, recurring customers, or some secret sauce no one else has, it might fetch more than the books suggest. On the flip side, if your financials are a mess or half your clients are leaving, expect buyers to knock some pounds off.

Advantages

Knowing the value of your business isn’t just for sales. It can help you attract investors, secure funding, or split ownership fairly if you're bringing in a partner (or parting ways with one). It also helps you set goals — if your company’s worth £500k today, how do you get it to £1 million in five years?

A proper valuation gives you credibility. Banks, investors, even staff — they all take you more seriously when you know your numbers. It’s also handy for insurance, tax planning, and keeping your head straight during negotiations.

Disadvantages

Valuation is part science, part opinion — which means it can be contested. If you’re selling and think your business is worth £1 million, but buyers reckon it’s closer to £600k, you’ve got a problem. Worse, you might chase an inflated value and scare off good buyers.

Getting a valuation can also cost time and money. Professional valuations aren’t cheap, and DIY ones can be unreliable. If you’re too close to your business (emotionally or otherwise), you’ll probably either overvalue it or miss key risks. And once a number’s out there, it’s hard to walk it back — especially if it’s too high.

When Should You Get a Business Valuation?

A valuation isn’t just for buying or selling. You might need one when raising investment, securing a loan, bringing on a co-founder, settling a divorce, dealing with probate, or issuing employee shares. Basically, if money’s changing hands and a business is involved, someone’s going to ask, “What’s it worth then?”

Common Mistakes in Business Valuation

A classic blunder is using revenue instead of profit. Just because a business turns over £1 million doesn’t mean it’s profitable. Another mistake? Ignoring liabilities. That fancy new office might look impressive, but if it’s being paid off at 12% interest, it’s a cost, not a crown jewel.

And then there’s the classic: emotional bias. You might feel your business is worth a fortune — after all, it’s your baby — but buyers only care about results, not sentiment.

The Role of Intangibles

Your brand, reputation, client relationships, domain name, or even Google rankings can influence value. These things don’t show up on the balance sheet, but they absolutely impact what someone’s willing to pay. That said, proving their value can be tricky — and it often comes down to negotiation, not hard maths.

Valuing a Startup vs. an Established Business

Startups often have little to no profit, so traditional methods don’t always work. Instead, they’re valued based on potential: market opportunity, user growth, technology, and the team behind it. That’s why some startups with zero profit can be valued in the millions, while a profitable corner shop might struggle to fetch six figures.

Who Should Do Your Valuation?

You can do it yourself — especially if it’s just for internal planning. But if you’re looking for outside investment, negotiating a sale, or need something legally solid, bring in a professional: an accountant, a corporate finance advisor, or a business broker. They bring objectivity and industry benchmarks — and they’ll probably ask better questions than you want to answer.

Valuation Changes Over Time

A business’s value isn’t fixed. It can go up (new contracts, better margins, industry booms) or down (lost clients, poor leadership, recession). So if you got a valuation 18 months ago and are still quoting it, it’s like trying to sell last year’s milk — probably past its best.

In Summary

Valuing a business is about much more than checking the bank balance or guessing what someone might pay. It involves analysing assets, income, market trends, and sometimes a bit of gut instinct. Whether you’re buying, selling, or just curious, understanding how valuations work gives you power — the power to make smarter decisions, avoid dodgy deals, and hopefully walk away with a few more zeroes than you started with.