Buyers pay a multiple of profit. That much most owners know. What surprises them is how wide the range of multiples is for businesses that make exactly the same money. Here is a worked example. The two businesses and their figures are illustrative, chosen to show the mechanics, not taken from a real sale.
Two businesses, one profit figure
Both make £400,000 a year of adjusted profit, after the owner is replaced with a market-rate manager.
Business A is run by its owner. The owner holds the main customer relationships and makes most decisions. One customer is 40% of revenue. The accounts are prepared once a year and the adjustments are hard to prove.
Business B has a manager who runs it day to day. No customer is more than 10% of revenue, and much of it is on contracts that renew. It has monthly management accounts and three clean years of figures with documented adjustments.
What a buyer offers
- Business A: a buyer sees risk everywhere: the owner leaving, the big customer leaving, numbers they cannot verify. They offer three times profit, £1.2m, with 40% of it in an earn-out that depends on the business performing after the owner has gone. Cash on the day: £720,000.
- Business B: the same buyer sees a business that will run without its owner. They offer six times profit, £2.4m, with 90% paid at completion. Cash on the day: £2,160,000.
Same profit. Twice the headline price, and three times the cash on the day.
Where the difference comes from
None of the gap came from earning more. It came from risk. Each thing that made Business A risky to a buyer cost it part of its multiple:
- Dependence on the owner. A buyer pays for what happens after you leave.
- Customer concentration. One customer at 40% is 40% of the business that could leave with one phone call.
- Unprovable numbers. An adjustment a buyer cannot verify is an adjustment they will not pay for.
- No predictable income. Revenue that renews is worth more than revenue that has to be won again every year.
Every one of these can be changed by the owner, but not quickly. That is why preparation usually takes six to twelve months of deliberate work, and why it is best started long before a buyer appears.
Try it on your own figures
The valuation calculator shows what each half-turn on the multiple is worth at your profit, and the Harvest Score shows which of these risks a buyer would see first in your business.
An illustration, not a promise. What a buyer pays depends on your business, your market and your buyer. Preparation is the part you control.
Common questions
Is it realistic for preparation to double a sale price?
It depends on where you start. The example on this page is illustrative. For a business that depends heavily on its owner or one customer, fixing those risks can move the multiple a long way; for one that is already well run, the gain is smaller. Nobody can promise a result.
What multiple will my business sell for?
Multiples depend on size, sector, growth and risk. Our guide to EBITDA multiples in the UK covers typical ranges, and the valuation calculator lets you test your own figures.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
