A valuation should help you make a decision you can explain. Before choosing a multiple or building a model, establish what is being valued, the relevant date and the intended use. This guide compares the main business valuation methods and shows how the numbers connect.
Start with the valuation question
A sale of the entire company, a minority shareholder transfer and an employee share award can require different analyses. A useful brief identifies the company or interest, valuation date, intended readers, basis of value and operating premise. Market value and accounting fair value should not simply be treated as interchangeable labels.
ICAEW’s business and share valuation guide explains why the assignment must be defined before a method is selected. For a commissioned report, see our independent business valuation service.
Business valuation methods compared
| Method | What drives the calculation | Main question to test |
|---|---|---|
| Discounted cash flow | Forecast cash flows, discount rate and value beyond the explicit forecast | Are the forecasts, investment needs and risks supportable? |
| Earnings multiples | Maintainable EBITDA, EBIT or earnings and a compatible multiple | Are the earnings normalised and the comparables relevant? |
| Revenue multiples | A defined revenue measure and comparable pricing evidence | Do growth, margins and recurring revenue justify the comparison? |
| Adjusted net assets | Relevant asset values less relevant liabilities | Does an asset-based view capture the economic value being assessed? |
An approach is the overall framework; a method is how it is applied. For example, an EV/EBITDA comparison and an EV/revenue comparison can both sit within the market approach. A prior funding round is evidence to assess, not an automatic answer for every share class or later date.
Earnings multiples: from operating performance to share value
Begin with the earnings a buyer or investor can reasonably assess as sustainable. Review owner remuneration, related-party charges, unusual litigation costs, discontinued activity and missing recurring costs. An adjustment should have a reason and supporting evidence. Removing every inconvenient expense will not create credible maintainable earnings.
Next, test the multiple against comparable businesses or transactions. Size, geography, growth, margins, customer dependence, recurring revenue and the transaction date can all affect comparability. Align the financial period and accounting treatment, including leases, with the evidence. An old sector average is not a valuation conclusion.
The 4.0× assumption is chosen to demonstrate the calculation. It is not a quoted market rate or a recommendation for your company. If a sale uses a working-capital adjustment, that is an additional agreed mechanism: our working-capital adjustment guide shows how it affects the bridge.
A price/earnings multiple applies to earnings attributable to equity and normally produces equity value directly. Do not deduct debt again as if the answer were enterprise value. Keep the numerator, denominator and adjustment bridge consistent.
DCF: make the cash generation visible
A discounted cash flow valuation estimates the present value of future cash flows. An enterprise DCF typically uses unlevered operating free cash flow after operating taxes, capital expenditure and working-capital investment, discounted at a compatible weighted average cost of capital. An equity cash-flow model uses a different cash-flow definition and cost of equity. Mixing the two can materially distort the answer.
The following simplified example assumes cash flows arrive at each year end, a 15% discount rate and 2% perpetual growth after year five. All assumptions are illustrative. A real model needs business-specific forecasts, a supportable discount rate and a sustainable terminal period.
| Year | Illustrative unlevered free cash flow |
|---|---|
| 1 | £150,000 |
| 2 | £165,000 |
| 3 | £180,000 |
| 4 | £190,000 |
| 5 | £200,000 |
The present value of years one to five is approximately £582,000. Terminal value at the end of year five is £200,000 × 1.02 ÷ (15% − 2%), or approximately £1,569,000. Discounting that terminal value gives £780,000 today. Total enterprise value is therefore approximately £1,362,000, before the enterprise-to-equity bridge. Figures are rounded to the nearest £1,000.
In this example, the terminal period contributes most of the value. Challenge its growth, margins, reinvestment and risk rather than treating the spreadsheet output as precise. Our financial modelling service can support a forecast and scenario analysis within an agreed engagement.
Revenue and assets: two different lenses
Revenue multiples
Useful comparisons need a consistent revenue definition and evidence of comparable economics. Two businesses with £2 million of revenue can have very different margins, churn, delivery costs and cash needs.
Adjusted net assets
Review the value of the relevant assets and deduct the relevant liabilities. Book values may need adjustment. This can be important for asset-holding businesses, but it may not capture the earning power of an established trading operation.
For technology, AI and data businesses, assess the quality and ownership of IP, customer contracts, reliance on key people, infrastructure costs and the durability of demand. For an established SME, working-capital intensity, maintainable profit and customer concentration may be central. A sector label does not replace evidence.
Asset value is not automatically liquidation value. The operating premise, realisation costs and timing matter. Where an adjusted net-asset calculation already includes debt and cash in arriving at equity value, avoid adding or deducting those items a second time. The CFA Institute’s private company valuation overview provides further context on income, market and asset-based methods.
Turn the calculation into a defensible conclusion
- Reconcile the evidence. Explain why methods differ rather than applying a fixed weighting or an automatic average.
- Match the interest. The value of an entire company is not automatically the pro-rata value of a particular shareholding. Rights and the applicable basis matter; discounts are not automatic.
- Show the range. Test meaningful assumptions such as margin, retention, customer loss, investment and discount rate.
- Explain the limitations. Distinguish verified records, management forecasts and assumptions. Identify information gaps that could change the conclusion.
- Connect value to action. Prioritise better records, evidence of recurring demand and cash conversion before presenting a valuation to a buyer or investor.
A clear report should let the reader follow the brief, evidence, method, adjustments and conclusion. It should also explain who may rely on it and for what purpose. A valuation supports a decision; a negotiated sale price also depends on buyer appetite, financing and contractual terms.
Frequently asked questions
What are the main business valuation methods?
Common methods include discounted cash flow, comparable-company and transaction multiples, and adjusted net assets. Earnings and revenue multiples are usually applications of a market approach rather than separate valuation approaches. The purpose, evidence and business model determine which methods are suitable.
Which valuation method is best for a small UK company?
There is no universal best method. A profitable trading business may support an earnings-based valuation, while a forecast-led business may need DCF scenarios and an asset-holding company may need adjusted net assets. The selected method must fit the valuation purpose and available evidence.
Is an EBITDA multiple the value of my shares?
An enterprise-value-to-EBITDA multiple normally produces enterprise value. Agreed surplus cash, debt and other relevant adjustments are then considered to reach equity value. A specific shareholding may need further analysis of its rights and the valuation basis.
Can I value an AI or technology company on revenue?
Revenue multiples can be relevant where comparable evidence supports them. Recurring revenue, margins, retention, customer concentration, development costs and the route to cash generation still matter. An AI label alone does not justify a higher multiple.
Why can two valuations of the same company differ?
The purpose, date, basis of value, share rights, forecasts and market evidence may differ. Compare these inputs before comparing the headline conclusions. A negotiated acquisition price can also reflect buyer-specific benefits and deal terms.
Should I average the results of every method?
No. Reconcile the reasons for differences and give weight to the most relevant evidence. A simple average can hide inconsistent assumptions, weak comparables or double-counted assets.
What information should I prepare for a valuation?
Prepare recent accounts, current management information, forecasts, cash and debt schedules, ownership details and relevant share agreements. Include customer concentration, material contracts and explanations of unusual income or costs. The exact information request depends on the agreed scope.
Does a commercial valuation cover EMI or other tax purposes?
Do not assume it does. Tax and employee-share valuations may require a specific basis, share-rights analysis and submission process. Agree the intended use at the outset and commission the relevant specialist scope.
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Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.