Most owners have a number in their head. A valuation turns that number into something a buyer, a bank or a court can test. Here is the process professional valuers follow, reduced to steps you can work through yourself.
Step 1 — Fix the purpose and the date
Value is not a single universal figure. A valuation for a friendly share transfer, a divorce settlement, a bank facility and a competitive sale can all produce different answers from identical accounts. Before touching a spreadsheet, write down the purpose, the valuation date and the basis — usually fair market value, being the price a willing but not anxious buyer and seller would agree.
Step 2 — Normalise the earnings
Small business accounts are prepared to minimise tax, not to show earning power. Rebuild them. Start with reported net profit and add back items that a new owner would not incur, then subtract anything the accounts understate.
- Owner salary above or below a market wage for the role
- One-off legal, restructuring or setup costs
- Personal expenses run through the business — vehicles, travel, phones
- Related-party rent above or below market
- Non-recurring revenue such as grants or insurance recoveries
- A realistic allowance for maintenance capital expenditure
The result is either EBITDA (earnings before interest, tax, depreciation and amortisation) for a business with management in place, or SDE (seller's discretionary earnings) for an owner-operated business where the buyer will replace the owner's labour.
Step 3 — Choose several methods, not one
Credible valuations triangulate. The three recognised approaches are income (what the future earnings are worth today), market (what comparable businesses sell for) and asset (what it would cost to rebuild the balance sheet). Run all three. If they disagree wildly, that disagreement is itself information — usually about growth expectations or asset intensity.
Step 4 — Select and defend the multiple
A multiple is a shorthand for risk and growth. Two businesses in the same industry with the same EBITDA rarely deserve the same multiple. Adjust for size, revenue quality, customer concentration, owner dependence, contract length, margin trend and the state of the systems and records.
A one-turn difference in multiple on $400k of EBITDA is $400,000 of price. Nothing else in the process moves value that much.
Step 5 — Bridge enterprise value to equity value
Most multiples produce enterprise value: the value of the operating business, debt-free and cash-free. To get the price for the shares, subtract interest-bearing debt, add surplus cash and non-operating assets, and adjust for any shortfall in normal working capital.
Step 6 — Apply discounts and premiums carefully
A minority stake with no control over dividends or a sale is worth less per share than the whole. Private businesses are also less liquid than listed shares. Both discounts are real, both are frequently overstated, and both should be explained rather than pulled from a rule of thumb.
Step 7 — Present a range, then sanity-check it
Publish a range with a preferred point inside it. Then test it: could a buyer service acquisition debt from the earnings? Does the implied return beat what they could get elsewhere at similar risk? Would you buy it at that price? If any answer is no, revisit the assumptions rather than the conclusion.
Common mistakes
- Valuing revenue instead of earnings in a low-margin business
- Using a listed-company multiple for a business with one location and one owner
- Double counting — adding back owner salary and then also deducting a manager's wage twice
- Forgetting working capital, which is often the single biggest deal-day surprise
- Treating goodwill on the balance sheet as if it were value
Utopia Value runs this entire sequence automatically across a dozen methods and produces the working in a downloadable report, so you can see exactly which assumptions drive your number.