How UK Business Valuations Actually Work

5 min read

What You'll Learn:

  • How EBITDA multiples work in practice
  • Why software companies get 4-6× but field services get 3-5×
  • What factors increase or decrease your multiple
  • Real examples from UK SME acquisitions

The Foundation: EBITDA Multiples

When buyers value UK SMEs, they typically use EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) multiples. This means your business value = EBITDA × Industry Multiple.

For example: If your business makes £500k EBITDA and your industry trades at 5× multiples, your business is worth approximately £2.5M.

Why Multiples Vary by Industry

Not all businesses get the same multiple. Here's what I've seen as a buyer evaluating UK SMEs:

Typical UK SME Multiples by Industry
  • SaaS/Software: 4-6× EBITDA (recurring revenue premium)
  • Professional Services: 3-5× EBITDA (depends on client retention)
  • Manufacturing: 3-4× EBITDA (asset-heavy, lower margins)
  • E-commerce: 2-4× EBITDA (customer acquisition costs vary)
  • Field Services: 3-5× EBITDA (recurring work gets higher multiples)

What Increases Your Multiple

Within your industry, these factors push your valuation higher:

  1. Recurring Revenue: Contracts, subscriptions, or repeat customers = predictability = higher multiple
  2. Low Customer Concentration: No single customer >10% of revenue = less risk = higher multiple
  3. Strong Margins: 30%+ EBITDA margin shows pricing power
  4. Growth: 20%+ YoY growth can add 1-2× to your multiple
  5. Low Owner Dependency: Business runs without you = higher multiple
  6. Clean Financials: Audited accounts, clean books = buyer confidence

What Kills Your Valuation

These red flags will drop your multiple or kill deals entirely:

  1. Customer Concentration: One customer >25% = 1-2× multiple reduction
  2. Revenue Decline: YoY revenue drop = instant discount or walk-away
  3. Owner Does Everything: You're irreplaceable = massive discount
  4. Messy Financials: No clear EBITDA = buyers assume the worst
  5. Legal Issues: IP disputes, employee claims = deal killer

Adjusted EBITDA: What Buyers Actually Look At

Buyers don't use your reported EBITDA. They adjust it for "normalizations" and "add-backs":

Common EBITDA Adjustments

Add Back (Increases EBITDA):

  • Owner's excessive salary (above market rate)
  • One-time expenses (office relocation, lawsuit settlement)
  • Personal expenses run through business

Deduct (Decreases EBITDA):

  • Below-market owner salary (need to hire replacement)
  • Unpaid family members working in business
  • Deferred maintenance or capex

Real Example: Software Company

I recently evaluated a £1.2M revenue SaaS business:

  • Reported EBITDA: £400k
  • Owner salary: £150k (market rate £80k) → Add back £70k
  • One-time migration costs: £30k → Add back
  • Adjusted EBITDA: £500k
  • Industry multiple: 5× (SaaS with 90% retention)
  • Valuation: £2.5M

What This Means for You

If you're thinking about selling in the next 2-5 years:

  1. Understand your adjusted EBITDA (not just reported profit)
  2. Know your industry's typical multiple range
  3. Fix the red flags that kill valuations (concentration, owner dependency)
  4. Build the factors that increase multiples (recurring revenue, growth)

Want to calculate your business value?

Use our free calculator to get an instant EBITDA-based valuation for your UK business.

About the Author: James Bryant is seeking to acquire his first UK SME. After evaluating 20+ businesses, he's learned how buyers actually value businesses. This article shares the buyer's perspective to help sellers understand valuations better.