Valuing an SME in the UK — the full methodology

Step 1 — Build defensible adjusted EBITDA

Adjusted EBITDA is your starting point and it needs to survive buyer diligence. Take operating profit, add back depreciation and amortisation, then apply the ten legitimate UK SME owner add-backs (see our EBITDA guide). Aggressive add-backs cost you multiple — buyers punish over-claiming with a 0.3–0.5× discount.

Present adjusted EBITDA with a full reconciliation to statutory operating profit, one line per add-back, with narrative. This is the single most important table in your Information Memorandum.

Step 2 — Select the primary method for your size band

• Micro (< £250k EBITDA): SDE × 1.5×–3.0×. EBITDA cross-check.
• Small (£250k–£1m): EBITDA × sector multiple. SDE cross-check.
• Lower mid-market (£1m–£3m): EBITDA × sector multiple. DCF cross-check.
• Upper mid-market (£3m+): EBITDA × sector multiple + DCF, equal weight. Precedent transactions added.

Step 3 — Pick the sector multiple honestly

Look up your sector and size band in the EBITDA multiples database. Start from the P50 (midpoint). Don't start from P75 unless you can point to two of the following: recurring revenue > 60%, growth > sector average, low concentration, low owner-dependency, above-average margin.

Step 4 — Apply quality adjustments (the six levers)

Multiples move within the range for very specific reasons. Adjust for each honestly:

1. Recurring revenue share. ±15% around the midpoint typical.
2. Customer concentration. Top-3 > 30% → −15–25%.
3. Growth rate. 20%+ YoY EBITDA → +30–50%.
4. Owner dependency. True independence from owner → +15–20%.
5. Gross margin. Above sector norm → +10–20%.
6. Contract quality. Long-dated, transferable → +15–30%.

Step 5 — Cross-check with the second method

Whichever method wasn't your primary, run it now. If the answers agree within 15%, publish the range. If they diverge sharply, one of your inputs is wrong — usually an aggressive add-back, an over-optimistic growth rate, or the wrong size band. Fix it before going public with a number.

Step 6 — Precedent transactions (for lower-mid-market and above)

Above £1m EBITDA, buyers expect you to reference 3–5 precedent transactions in your sector from the last 24 months. Sell Ltd includes these in every IM. Precedents anchor your range in the buyer's world and shift the negotiation from "what does the seller want" to "what has the market recently paid".

Step 7 — From enterprise value to equity value to net proceeds

Enterprise value × cash-free debt-free basis is the standard UK SME headline. To get to equity value, add cash and deduct debt at completion. To get to net proceeds, subtract advisor fees, deferred consideration, earn-out risk, and CGT (usually 10% or 14% depending on Business Asset Disposal Relief availability). A £2m enterprise value can become anywhere from £1.4m to £1.9m in the seller's pocket depending on structure.

Step 8 — Deal structure — the 20% of price you can't see in the headline

• Cash on completion: the certain part. Aim for 60%+ on a healthy business.
• Deferred consideration: fixed sums payable 6–24 months later. Ensure guaranteed.
• Earn-out: paid only if the business hits agreed metrics. Negotiate metrics you control.
• Rollover equity: you keep 10–30% of the new group. Growth upside; illiquidity.
• Working-capital target: the level of WC you must hand over. Under-delivering costs the shortfall pound-for-pound.

Step 9 — Tax planning

Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief) caps CGT at 14% on the first £1m of lifetime gains. Employee Ownership Trusts (EOTs) offer 0% CGT if structured correctly but require majority-EOT ownership. Family investment companies, staged sales and pension-linked structures may reduce tax further. Get specialist corporate tax advice before signing heads of terms — post-signing restructuring is usually blocked.

Step 10 — Run a real process

Every step above is worth 5–10% of price. The single biggest lever is running a proper competitive process with 3–8 serious bidders. Off-market one-buyer deals clear at 15–25% below competitive-process prices — every time. Chris drafts your buyer longlist as part of your Information Memorandum, you approve, we reach out. Free to start.