How to Value a Business You Want to Buy

The asking price on a business for sale is the seller's opening position, not a fact. As a buyer, your job is to work out what the business is worth to you, given what it earns, what it would cost to replace and how much risk you are taking on. This guide explains the methods agents and buyers use, so you can judge whether a price is fair.

Start with what the business really earns

Most small UK businesses are priced as a multiple of their profit, so the profit figure matters more than anything else. Look for the adjusted net profit: the net profit in the accounts, plus costs that a new owner would not have, such as the current owner's salary and personal expenses, interest on loans that will be repaid, or genuinely one-off costs.

Check every add-back. A reasonable one is something like a director's salary that will not continue. A doubtful one is anything you cannot see in the records. And remember to take off the cost of running the business yourself, or paying a manager to: if the owner works sixty hours a week, that time has a value.

Profit multiples

The price is usually a multiple of the adjusted profit. For established small businesses, multiples commonly sit somewhere between about two and five times, but they vary widely by sector, size and risk. A business with steady, contracted income, a strong team and a long lease will sell at the higher end; one that depends on the owner, has a short lease or uneven trading will sell lower.

A quick sense check: divide the asking price by the adjusted profit. If the answer is far above what similar businesses sell for, the seller needs a good reason, and you should hear it.

Compare with similar businesses

The best evidence of value is what similar businesses are priced at. Look at businesses of the same type, in similar areas, with similar profit. On Find My Businesses your Finder does this for you: it compares the price of each business with others of its kind and tells you whether it looks high, low or in line, and how many businesses the comparison is based on.

Assets, stock and property

Freehold property is usually valued separately, on its property value, with the business (goodwill) on top.
Stock is normally added to the price at valuation on completion, so the asking price is usually "plus stock at valuation". Ask what a typical stock level is.
Equipment and vehicles are part of the price, but check their age, condition and whether any are on finance.

What should lower your offer

Profit that depends heavily on the owner's skills, contacts or hours
A short lease, a big rent review coming, or a landlord who may not consent to assignment
Falling sales, or a single customer who accounts for a large share of turnover
Accounts that are late, unaudited and hard to reconcile with the bank statements
Investment you will need to make soon: equipment, refurbishment, compliance work

What it is worth to you

Finally, work out what the business will pay you. Take the adjusted profit, subtract a fair wage for your own work, the cost of any finance, and a reserve for the unexpected. How many years would it take for the business to pay back what you put in? If the answer is uncomfortable, the price is probably too high for you, whatever the market says.

Agents expect negotiation, and a reasoned offer backed by evidence carries more weight than a round number. If due diligence turns up something the price did not allow for, it is normal to revisit the offer.