Our valuation tool uses a mathematical model and figures from your latest financial performance to generate an indicative sale price and payment plan. Here we run through the key steps and explain some of the calculations we use to work out the valuation.
1) Calculate the EBITDA
Your EBITDA is your Earnings Before Interest, Tax, Depreciation, and Amortisation. For most small, straightforward businesses, it’s similar to the operating profit (before corporation tax).
2) Calculate the adjusted EBITDA
Most small business owners don’t pay themselves big salaries. Founders often take the NIC threshold salary, around £12,000 per year, and rely on dividends and capital growth to make their efforts worthwhile. This smart tax planning needs to be taken into consideration in the valuation.
That EBITDA is calculated after salaries but before dividends. So, the key question here is could the business ‘replace’ the founder, or find someone to cover the roles and tasks they have been doing, for £12,000 per year? The answer is almost certainly “no”. So, the EBITDA needs to be adjusted to reflect fair market remuneration for the founder.
3) The multiplication step
The adjusted EBITDA is now multiplied by a number (imaginatively) known as the multiple. This is where the valuation can become subjective. This is no single, universally correct multiple. Several factors can influence the multiple:
- Industry norms. Are there any precedents or standards in your industry sector?
- Business outlook. Is the business growing, stable, or declining?
- Revenue reliability. How regular is your income? Recurring revenue is worth more than project-based income.
- Competitive advantages. Does your business have something unique that competitors can't easily copy?
- Future outlook. Are there significant opportunities or risks on the horizon that could dramatically change profits?
Some businesses have intellectual property or other assets that could be valuable. But in an EOT sale, these are often not considered because the founder can only be paid out of actual profit. Meaning future potential (that might excite external investors) doesn’t count for much here.
For an EOT sale, a multiple of three to four is often considered reasonable.
4) Accounting for net assets
The question here is if there are net assets in the company at the time of sale, should they also be added to the valuation? The answer is sort of! Business owners often perceive money in the company as somehow worth less than their personal money – tax is the primary reason for this. In the same spirit, any net assets are typically discounted before being added to the final valuation.
5) The final calculation
- Adjusted EBITDA multiplied by Multiple
- £120,000 x 4
- plus Fair share of net assets
- + £120,000
- Final agreed value
- £600,000
Reality check
Many founders think their business should be worth more than the valuation. It’s special, their “baby”! The key to a successful EOT sale is a sale price and payment plan that is balanced – it needs to work for the business and the employees, as well as for you. We tackle the common misconception that selling to an EOT means a founder can name their price in our mythbuster series.
Go EO’s formal valuation
While our valuation tool offers a helpful starting point, it is a simplified calculation. When we prepare your official pre-sale valuation and payment plan, we’ll apply our accounting expertise and professional judgment – considering other factors that can influence the final figure. Be warned this doesn’t mean we will calculate a higher figure than our tool suggests!