You hear that a company in your sector sold for five times profit. Your business makes £1m. Five million pounds starts to feel like a reasonable expectation.
Then a buyer asks which profit figure you mean. Their advisers want to discuss debt, cash and the amount of working capital that stays in the company. Part of the offer depends on performance after completion. You still have fees and tax to consider.
The original £5m calculation was a starting point. It left several important questions unanswered.
When an owner asks how much they can sell their business for, I want to establish three things: what supports the valuation, how the transaction converts that valuation into a price for their shares, and when they could actually receive the money.
Getting those distinctions clear gives you a much better basis for deciding whether an exit will achieve what you want.
Start by understanding the profit a buyer is being asked to purchase.
A common valuation approach for established profitable businesses applies a multiple to adjusted earnings. Other approaches may be more suitable for particular businesses, including asset-based methods and discounted cash flow. The method needs to fit the business. The British Business Bank outlines the principal valuation approaches.
You will often hear the term EBITDA: earnings before interest, tax, depreciation and amortisation. It is a profit measure, not the cash available in the bank. It excludes items that can still represent significant economic costs, including the investment needed to maintain equipment.
The next word to examine is “adjusted”. Buyers and sellers use adjustments to consider what the business's ongoing earnings might look like. That requires judgement about the costs and income that will continue.
If you have incurred a genuinely exceptional legal cost, there may be a reasonable argument for adding it back. If you have held your own salary below the cost of employing someone to do your job, the ongoing earnings may need to come down.
The fact that a cost feels optional to you does not establish that the next owner can remove it. Your role may be essential even if your remuneration has been arranged primarily around dividends.
Take this invented example. It illustrates the mechanics; it is not a valuation benchmark or a Northbound client case.
| Earnings assessment | Amount |
|---|---|
| Reported annual EBITDA | £1,000,000 |
| Add a supported, genuinely non-recurring expense | £80,000 |
| Deduct the additional annual cost of replacing the owner's work, above remuneration already charged | (£150,000) |
| Deduct an omitted recurring operating cost | (£30,000) |
| Illustrative adjusted EBITDA | £900,000 |
The assessment includes adjustments in both directions. It also makes the replacement cost incremental, so remuneration already in the accounts is not counted twice.
I would want a document behind each adjustment, a clear explanation and a view on whether the issue recurs. Repeated exceptional costs deserve particular attention. If the business finds a different reason for a large adjustment every year, the buyer may reasonably ask what level of disruption is normal.
The multiple needs a commercial explanation.
Suppose, purely for illustration, a buyer uses a multiple of five on that £900,000 earnings figure. The resulting enterprise valuation is £4.5m.
That arithmetic does not establish that five is the appropriate multiple. The buyer's view of risk, growth, cash generation, strategic fit and available alternatives all matter.
Compare two businesses with the same earnings. In one, customers have repeatable reasons to buy, the management team handles important decisions and the business produces cash consistently. In the other, a major customer is considering a tender, the founder holds the principal relationships and maintaining the equipment requires substantial investment.
An identical profit figure does not make those situations equivalent.
Ask what sits behind any comparable transaction. Was it the same type and size of business? Did the quoted price include property? Was some consideration contingent? Was the buyer acquiring capabilities that had unusual value to them? Was the earnings figure historical or forecast?
You may not be able to obtain all those answers for a private transaction. That uncertainty should remain visible in the valuation range. A precise multiple built on incomplete information is still an estimate.
Check that the accounting basis is comparable.
This is particularly relevant for UK businesses using FRS 102 in 2026. Most amendments from the latest periodic review apply to accounting periods beginning on or after 1 January 2026, including changes to lease and revenue accounting. Not all comparative information is restated onto the new basis. The Financial Reporting Council explains the changes.
For affected leases, a rental expense may be replaced by depreciation and interest, which sit below EBITDA. Reported EBITDA can therefore increase even though the underlying lease still requires cash payments. Revenue changes can also affect comparisons, depending on the contracts involved.
Before celebrating a jump in EBITDA, ask how much came from trading and how much came from accounting. The valuation measure, multiple and treatment of lease liabilities need to be considered consistently. Grant Thornton discusses these implications for transactions.
Enterprise value still has to become a price for the shares.
In a common cash-free, debt-free transaction structure, the parties move from the enterprise valuation to equity value by applying the agreed treatment of cash, debt and working capital. The sale agreement determines the definitions and calculation mechanism. ICAEW's completion-mechanisms guidance sets out this distinction.
Continue the invented example. Assume a sale of 100% of the ordinary shares by one owner, no other share classes, and no property or other assets being valued separately. For this illustration, the £4.5m is the maximum enterprise price, including a potential earn-out. Assume the following balance-sheet adjustments are agreed and do not overlap.
| From maximum enterprise price to maximum equity consideration | Amount |
|---|---|
| Maximum enterprise price | £4,500,000 |
| Add agreed surplus cash | £200,000 |
| Deduct agreed debt and debt-like items | (£800,000) |
| Deduct working capital shortfall against the agreed target | (£100,000) |
| Maximum consideration for the shares | £3,800,000 |
The £200,000 is cash agreed to qualify for the adjustment. It is not an assumption that every pound in the bank is surplus. The working capital adjustment compensates for delivering less than the agreed level required by the deal. Different definitions or a different completion mechanism would change the calculation.
This is where apparently small drafting points become real money. If an amount is already treated as debt, it should not inadvertently reduce the price again through the working capital calculation. If there are several shareholders or different rights attached to their shares, you also need to calculate who receives what.
Separate money at completion from money you may receive later.
Suppose the buyer proposes paying the £3.8m maximum consideration as follows:
| Payment component | Amount | What the owner needs to understand |
|---|---|---|
| Cash at completion | £3,100,000 | Amount paid at completion, before the assumed seller costs and tax |
| Fixed deferred consideration | £400,000 | Payment terms, security, conditions and the buyer's ability to pay |
| Maximum earn-out | £300,000 | Performance conditions and the possibility of receiving less, or nothing |
| Maximum total | £3,800,000 | Includes the full potential earn-out |
Assume seller fees of £150,000 are paid at completion. The immediate cash after those fees is £2.95m, before tax. If the fixed deferred consideration is paid in full, receipts after those fees reach £3.35m. If the full earn-out is also achieved and paid, they reach £3.65m. Each figure remains before tax and assumes no other deductions or claims.
That is a much more useful description of the offer than “£5m for the business”.
Fixed deferred consideration still carries payment risk. An earn-out adds performance risk. An escrow or retention, if included in another deal, introduces a further distinction between money allocated to the seller and money they can use immediately.
For an earn-out, I would examine which actions remain within your control. Who decides pricing, staffing and investment? Can the buyer allocate central costs to the business? What happens if they move customers or combine operations? How is a disagreement over the calculation resolved? The commercial intention needs to survive the detailed drafting. Grant Thornton's earn-out guide discusses these risks.
Tax needs its own calculation.
A valuation is not an after-tax retirement plan. Your share ownership, residence, acquisition cost, available reliefs, sale structure and payment arrangements can all affect the result.
Selling your shares also differs from the company selling its business assets. In an asset sale, the money initially belongs to the company; reaching the owner's personal bank account is a separate part of the analysis. HMRC explains tax on company asset disposals.
Ask your tax adviser to model the actual proposed terms, including when tax becomes due in relation to when cash arrives. Do not assume that a deferred payment automatically means deferred tax. Keep that calculation alongside your assessment of the offer, with assumptions clearly recorded.
Use the valuation to choose the next piece of work.
Once the mechanics are clear, a valuation discussion can become practical.
If ongoing earnings fall after allowing for a replacement manager, you need to understand whether the business can support that role and how to improve its economics. If customer concentration is the main concern, growing elsewhere may be more valuable than producing a more elaborate forecast. If the company continually absorbs cash, examine the operating cycle before assuming profit growth will solve the problem.
Some influences will remain outside your control, including buyer appetite and market conditions. Build a range of outcomes and consider which would still meet your objectives.
Before treating an offer as acceptable, I would want one clear page showing the earnings basis, valuation method, balance-sheet adjustments, payment timing, seller costs and estimated tax. Beside it, I would record what must happen for each later payment to arrive.
That page gives an owner something they can use: a view of the money, the conditions attached to it and the choices still available.
If you are trying to establish what an exit could mean for you, speak to Northbound. We can help examine the financial assumptions and preparation questions, alongside the transaction and tax specialists your situation requires.