If you’re a UK SME owner planning an exit, raising investment, or buying out a partner, you’ve probably heard three numbers thrown around as if they’re the same thing, EBITDA, profit, and cash. They’re not, and picking the wrong one can push your valuation up or down by a lot.
In Business Valuations, there isn’t one magic figure. Most buyers start with maintainable earnings, usually normalised EBITDA, then sanity-check it against profit, cash generation, and what’s sitting on the balance sheet. The number that matters most depends on what you sell, how you’re funded, and how much of the “profit” is really one-offs or owner choices.
This post keeps it simple with UK-style examples, a café where owner pay and rent can blur the picture, a service firm with few assets but recurring work, and an asset-heavy business where kit and property can set a floor value. You’ll leave with clear takeaways on what each number tells a buyer, what it hides, and how to get your accounts buyer-ready.
If you want a valuation you can defend in a deal, Consult EFC helps you tidy the story in your numbers before you go to market.
What each number really tells you (and what it can hide)
In Business Valuations, the hardest part is not getting a number, it’s understanding which number a buyer trusts. EBITDA, net profit, and cash flow each answer a different question. They also each have blind spots.
Think of it like checking a used car. EBITDA is the engine test, profit is the dashboard reading, and cash is the MOT history and service record. You need all three to avoid paying for a story that falls apart in due diligence.
EBITDA: a rough view of trading performance before financing and tax
EBITDA (earnings before interest, tax, depreciation and amortisation) is a quick way to compare businesses because it strips out financing choices, tax position, and some accounting charges that don’t reflect day-to-day trading. For buyers, it’s often the cleanest starting point when they want to understand the earning power of the core operation.
In most UK SME deals, the headline valuation is built on a multiple of normalised EBITDA. Normalised means you adjust for items that won’t continue post-sale (or that are not part of the underlying trade). This is where the real work sits, because small tweaks can change the value a lot.
A typical range for UK SMEs is often around 3 to 6 times EBITDA, but it can be wider (with stronger, lower-risk firms sometimes pushing higher). The multiple is where most of the debate sits because it reflects risk and confidence, not just maths. A buyer paying 6x is saying, “I believe this profit will still be here in a few years.”
What EBITDA tells you well:
- Trading performance without the noise of funding and tax.
- Comparability across firms with different debt and capital structures.
- A practical base for quick valuation maths in a deal.
What EBITDA can hide:
- Working capital drag (a business can show good EBITDA but swallow cash through stock and debtors).
- Capex reality (ignoring ongoing kit spend can flatter performance in asset-heavy firms).
- Owner dependency (if you are the key salesperson or operator, the multiple often drops, even if EBITDA looks strong).
If you want to improve value, you usually get more impact by making EBITDA more defendable (clear add-backs, repeatable margins, stable customer base) than by arguing over pennies in the accounts.
Net profit: the number in the accounts, but often not the number a buyer pays for
Net profit is what’s left after everything, operating costs, finance costs, tax, and accounting items such as depreciation and amortisation. It’s the number your statutory accounts spotlight, and it matters, but it’s often a poor proxy for what a buyer is really buying.
For owner-managed UK SMEs, net profit can understate earnings because you can run choices “through the business” that a buyer would not repeat. The trade might be solid, but the profit line looks thin.
Common reasons net profit gets distorted in SMEs include:
- Director pay choices: some owners keep salary low and take dividends, others pay higher salary for mortgage or pension reasons.
- Personal or family costs: vehicles, travel, phone contracts, or other items that are legitimate but not required for a new owner.
- One-offs: professional fees, a bad debt write-off, recruitment costs, or a one-time repair.
That said, don’t dismiss net profit. Buyers still use it as a credibility check. If EBITDA is strong but net profit is weak, they will ask why. It also matters for:
- Tax planning and HMRC consistency, because aggressive add-backs with messy records raise questions.
- Debt affordability, since lenders look at bottom-line strength and covenants.
- A useful cross-check against the story you are telling in EBITDA.
A clean set of accounts with a sensible profit profile builds trust. Trust reduces friction, and friction is what chips away at price during negotiations.
Cash (cash flow): the reality check that stops nasty surprises
Cash flow is where deals get real, because it shows what the business actually keeps, not what it records. Profit is measured on an accrual basis (invoices raised and costs matched), while cash depends on timing: when customers pay, when suppliers are paid, when VAT is due, and when PAYE hits the bank.
This is why a profitable business can still feel broke. You can be “making money” on paper while cash is tied up in:
- Debtors (customers paying in 60 days instead of 30).
- Stock (buying ahead of demand).
- Tax payments (VAT, PAYE, corporation tax instalments).
- Supplier terms (being forced to pay faster than you collect).
Working capital swings are a big factor in UK SMEs, especially in wholesale, construction, manufacturing, and any business with lumpy projects. A growth spurt can increase profit while draining cash, because you have to fund stock and labour before you get paid.
Buyers pay close attention to cash because it drives risk and deal structure. They will look at:
- Cash conversion: how reliably profit turns into cash over time.
- Debt and debt-like items: overdrafts, loans, HP, and sometimes old tax arrears.
- Seasonality: whether the business regularly dips into cash holes at certain points in the year.
If cash flow is weak, buyers often protect themselves through price adjustments (for example, working capital targets) or by changing terms (more deferred consideration, tighter warranties, or earn-outs). Strong, predictable cash does the opposite, it supports a higher multiple because it lowers the fear of surprises after completion.
How most UK buyers actually value SMEs in 2026 (and why EBITDA usually leads)
In UK Business Valuations, most buyers still start with normalised EBITDA and apply a multiple. It’s not because profit and cash don’t matter, they do. It’s because EBITDA gives a practical, like-for-like view of trading performance before financing choices and accounting policies muddy the water.
In 2026, buyers tend to be more cautious and more evidence-led. They’ll accept sensible adjustments, but they’ll test your assumptions hard. If you want the best price, the goal is simple: present maintainable earnings and back them up with clean records, stable margins, and a business that can run without you.
Normalised EBITDA: turning your accounts into “maintainable earnings”
Reported EBITDA is rarely the number a buyer pays for in an owner-managed SME. It’s a starting point. The buyer then asks, “What profit will still be here after completion, once the one-offs and owner choices stop?” That answer is normalised EBITDA, sometimes called maintainable EBITDA.
Typical add-backs and adjustments in UK SMEs include:
- One-off professional fees: legal costs for a dispute, HR advice on a one-time matter, or due diligence fees for a deal that didn’t happen.
- Redundancy and restructure costs: severance payments or short-term overlap costs when you’ve changed the team shape.
- Director perks and personal costs: private elements of vehicles, travel, subscriptions, family phones, or other items that don’t support trading.
- Over-market or under-market rent: especially when the premises are owned personally, buyers often adjust to a fair market rent.
- Exceptional repairs: a one-off roof repair or flood damage fix, as long as it’s not a pattern of under-maintenance.
- Covid-era support still in the numbers: any lingering grants, rates relief effects, or unusual cost drops that won’t repeat.
- Non-recurring consultancy: a specialist project (ERP install, rebrand, turnaround support) that doesn’t continue in steady state.
The key is tone and evidence. Be fair, not aggressive. If you try to add back every cost that hurts, buyers will assume the rest of the accounts are also “optional”. Strong deals are built on adjustments that are clear, well-documented, and easy to agree.
A mini-walkthrough looks like this:
- Reported EBITDA (from your accounts): £300,000
- Add-backs (genuine one-offs and owner-only items):
- One-off legal fees: £18,000
- Redundancy costs: £22,000
- Non-recurring consultancy project: £15,000
Total add-backs: £55,000
- Normalised EBITDA: £300,000 + £55,000 = £355,000
That £355,000 is the figure buyers usually want to value, because it represents what they think they can maintain, not what happened once.
The multiple: what changes it, and what you can control before a sale
Once EBITDA is normalised, the next question is the multiple. In 2026, UK SME multiples often fall somewhere in the 3x to 8x EBITDA range, with many deals clustering around the middle. The spread is wide because the multiple is really a price for risk and confidence, not effort.
Here’s what typically pushes the multiple down:
- Customer concentration: if one client makes up a big chunk of revenue, the buyer fears a sudden drop.
- Short or informal contracts: handshake deals can be great day-to-day, but they look fragile in due diligence.
- Lumpy or one-off sales: unpredictable pipelines make future earnings harder to trust.
- Unstable gross margins: heavy discounting, volatile input costs, or weak pricing discipline.
- Owner dependency: if you hold the relationships, do the quoting, and solve every problem, the buyer is really buying you.
- Poor management accounts: late MI, unclear margins by job, or weak debtor reporting slows a deal and chips away at value.
- Thin staff depth: one key person in ops, finance, or sales can be a single point of failure.
- Regulatory risk: unclear compliance or poor documentation (even if nothing is “wrong”) makes buyers cautious.
- A vague growth path: “we could grow” doesn’t land as well as “here are the next three hires and the unit economics”.
The good news is you can influence many of these within 6 to 18 months. A few practical moves that often support a stronger multiple:
- Reduce concentration risk by widening your customer base and proving it in monthly sales reports.
- Lock in recurring revenue where possible (retainers, service contracts, maintenance plans) and track churn.
- Build a second line by training leads, documenting processes, and letting managers run key meetings.
- Tighten MI with monthly P&L, balance sheet, cash summary, and simple KPIs (sales pipeline, gross margin by service line, debtor days).
- Clean up your contracts so key terms are written, current, and easy to review.
- Show margin control with consistent pricing rules and clear job costing where relevant.
In plain terms, you’re trying to make the business feel like a well-run machine, not a heroic effort. The less a buyer has to “fix”, the more they’ll pay for what already works.
From “enterprise value” to “equity value”: why cash and debt change the final price
An EBITDA multiple gives you enterprise value (EV). That’s the value of the operations, as if the business is bought free of its financing structure. Buyers like EV because it lets them compare businesses without getting distracted by whether you used loans, overdrafts, or your own cash.
But shareholders don’t receive enterprise value. Shareholders receive equity value, and that changes once you account for:
- Net debt: loans, overdrafts, hire purchase, lease liabilities treated as debt in deals, minus cash in the business.
- Working capital targets: most deals assume a “normal” level of debtors, stock, and creditors is left in the business at completion to fund day-to-day trading.
A plain example makes it clear:
- Normalised EBITDA: £400,000
- Multiple: 5x
- Enterprise value: £400,000 × 5 = £2,000,000
Now adjust to reach what shareholders get:
- Less net debt
- Bank loan: £300,000
- Overdraft: £80,000
- Hire purchase: £70,000
- Less cash at bank: (£100,000)
- Net debt: £350,000
Equity value so far: £2,000,000 minus £350,000 = £1,650,000
- Working capital adjustment
- Agreed normal working capital: £250,000
- Actual working capital at completion: £210,000
- Shortfall: £40,000
Final equity value: £1,650,000 minus £40,000 = £1,610,000
This is why sellers can feel shocked when a “£2m valuation” turns into a lower cheque. It’s not a trick, it’s the deal mechanics. If you want fewer surprises, get clear early on what counts as debt, what cash is included, and how working capital will be measured. Consult EFC can help you prepare those numbers in a way that stands up in buyer questions and keeps negotiation time focused on price, not confusion.
Simple UK examples that show why the “best” number depends on the business
In Business Valuations, buyers rarely argue that EBITDA, profit, or cash is “right” in isolation. They argue about which one best predicts what they will actually take out of the business after completion. The quickest way to see it is with simple, UK-style examples.
The consultancy with strong margins: EBITDA drives the headline valuation
A UK limited company consultancy shows £350,000 normalised EBITDA. A buyer agrees a 4.5x multiple, giving an enterprise value of £1,575,000 (£350,000 × 4.5).
Getting to that normalised EBITDA is often where value is won or lost. Two clean add-backs might be:
- A one-off recruitment fee for a replacement hire that won’t repeat.
- An excess director salary above a market rate for the role.
If your records are tidy (clear add-back evidence, consistent month-end reporting), and the work isn’t tied to you personally (account managers hold client relationships, delivery is documented), the multiple is easier to defend. The buyer will still test cash conversion and working capital, but EBITDA is the starting point for the headline number.
The growing café: profit looks fine, cash tells the real story
A café can show decent profit while feeling short of cash. Picture a month where the P&L shows £8,000 profit, but cash falls by £12,000 because:
- You buy extra stock ahead of a busy period.
- Card takings land a few days later.
- VAT and PAYE hit in the same week.
Buyers spot this fast. They may reduce the price, push for a working capital adjustment, or insist on debt-free completion (clearing overdrafts and tax balances) so they don’t fund yesterday’s bills.
The asset-heavy firm: profit matters, but assets set the floor price
For a small manufacturing or transport firm, assets create a reality check. Vehicles and kit can set a floor value, but earnings drive any goodwill above that.
Depreciation drags down profit, so EBITDA can look healthier, yet EBITDA can also flatter performance if the business needs heavy ongoing capex. A buyer often focuses on free cash flow after replacing equipment. If you must spend £80,000 a year just to keep the fleet running, that spend is as real as wages, even if EBITDA ignores it.
What to track month to month if you want a stronger valuation in 12 months
If you want a stronger price in Business Valuations, you need more than a good year-end result. Buyers pay for repeatable performance and low surprises. That comes from month-by-month numbers that line up across your P&L, balance sheet, and bank.
A simple way to think about it is this: you’re building a track record that a buyer can verify quickly. When the trend is positive and the paperwork backs it up, it’s easier to defend your normalised EBITDA, protect your multiple, and avoid awkward deal terms.
A simple scorecard: EBITDA, net profit and cash, plus the two extras buyers always ask about
You don’t need a complicated dashboard. You need a small set of measures that show trading strength, cash control, and working capital discipline. Track these monthly, in the same format, and explain the story behind any movement.
Here’s a basic scorecard that works for most UK SMEs:
- Normalised EBITDA trend: Track reported EBITDA and keep a running view of normalisation (owner adjustments and genuine one-offs). Buyers like an upward line, but they trust it more when it’s not built on heroic add-backs.
- Net profit margin: Net profit as a percentage of revenue keeps you honest. If EBITDA looks strong but net profit margin keeps slipping, buyers will ask if interest, depreciation, or “below the line” costs are masking issues.
- Operating cash flow: This is your reality check. Improving operating cash flow month to month proves that earnings convert into cash, not just invoices.
- Debtor days: Slower collections choke cash and create doubt. Falling debtor days signal better credit control, fewer disputes, and stronger processes.
- Creditor days: Buyers want to see sensible supplier terms, not a hidden cash squeeze. If creditor days spike, expect questions about late payments or stressed relationships.
- Stock days (if relevant): For product, wholesale, and manufacturing, stock days show whether growth is being funded by excess inventory. Lower, stable stock days usually mean fewer write-down risks.
- Net debt: Track borrowings minus cash, including overdrafts and hire purchase where relevant. A falling net debt position reduces perceived risk and often reduces price chips during completion accounts.
Why does this help valuation? Because buyers pay a higher multiple when they can see a business that runs like a well-kept house. Clean trends, steady margins, and improving working capital suggest you’re not relying on last-minute fixes to hit targets. It also makes due diligence faster, which keeps momentum and stops the deal turning into a discount conversation.
Clean evidence beats clever maths: the documents that make buyers trust your numbers
In a sale or investment process, buyers don’t reward complex spreadsheets. They reward clear evidence that ties out to the bank and the accounts. If you can hand over a tidy pack each month, it signals control, reduces risk, and gives fewer reasons to push for an earn-out.
Aim to prepare (and keep up to date) the following:
- Monthly management accounts: P&L, balance sheet, and a short commentary on what changed and why (price rises, new hires, lost client, margin shifts).
- Bank reconciliations: Done monthly, signed off, with any old reconciling items cleared. This is one of the fastest trust builders in a deal.
- Aged receivables: A clean aged debtors report with notes on top overdue accounts, disputes, and expected timing of payment.
- Revenue breakdown by customer: Monthly view of top customers, concentration, and trends. If one client is growing as a percentage of sales, you want to spot it early.
- Contract list: Who you sell to, what the term is, renewal dates, notice periods, and any price review clauses. Missing contracts create negotiation friction.
- Payroll summary: Headcount, salaries, employer NI, pensions, and any non-recurring items (bonuses, redundancy, maternity cover).
- Capex list: What you bought, when, and why, plus what’s planned. This helps buyers judge true cash needs, not just EBITDA.
- Debt schedule: Loans, overdrafts, hire purchase, repayment terms, interest rates, and security. Surprises here can change equity value late in the process.
- Clear notes for one-offs: A simple normalisation log with invoices attached (legal dispute costs, one-time consultancy, exceptional repairs, owner-only costs).
This kind of evidence does two things. First, it protects the multiple because the buyer can see the earnings are real and repeatable. Second, it reduces pressure for earn-outs because uncertainty is what drives deferred consideration. If you remove doubt, you keep more of the price on completion.
When to get help from Consult EFC, and what a valuation prep plan looks like
If you’re serious about improving valuation in the next 12 months, the best time to get support is before you’re under a buyer’s microscope. The aim is simple: get your numbers consistent, prove your normalised EBITDA, and remove avoidable deal risks.
A practical valuation prep plan often looks like this:
12 months out (get the basics right, fix gaps)
Start by tightening month-end close, so you have reliable management accounts within a set window each month. Clean up coding, agree how you treat one-offs, and make sure the balance sheet reconciles (bank, VAT, PAYE, loans). If there’s a messy area, director loan account, aged debt, stock accuracy, it’s cheaper to fix it now than explain it later.
6 months out (build your deal story in numbers)
This is where you formalise the normalisation schedule and keep it updated monthly. You also run a working capital analysis so you can explain debtor days, creditor days, and stock movements without guessing. This is usually the point where owners realise value is being held back by a few practical issues, slow billing, weak credit control, unclear margins by service line, or costs sitting in the wrong place.
Deal period (stay responsive and protect value in due diligence)
When buyers start asking questions, speed and accuracy matter. You want a clear data room, fast answers, and consistent support through diligence requests. This helps keep momentum, reduces the risk of retrades, and keeps the negotiation focused on price rather than confusion.
Consult EFC supports SMEs with advisory and accounting that’s built for growth, investment, and exit planning. If you want a stronger valuation in 12 months, start with a monthly scorecard and an evidence pack you’d be happy to hand to a buyer tomorrow.
Conclusion
Business Valuations usually start with maintainable earnings, and for many UK SMEs that means normalised EBITDA with a sensible multiple. Net profit still matters because it is the credibility check, if it’s weak, buyers will challenge the story behind your add-backs. Cash matters because it shows whether earnings turn into money in the bank, like a café that looks profitable but gets squeezed by VAT, stock, and card payment timing.
What you actually receive is shaped by cash, debt, and working capital, because enterprise value is not the same as the cheque at completion. Start tracking EBITDA, net profit, operating cash flow, debtor days, creditor days, stock (if relevant), and net debt every month, then keep the evidence tidy. If you want a clear, buyer-ready view of value that stands up in negotiations, speak with Consult EFC and get your numbers ready before a buyer asks.
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