Whether you’re thinking about selling, raising investment, buying out a co-founder or rewarding key people with equity, one question almost always comes first: What is the business actually worth?

For many founders and SME owners, valuation feels opaque, subjective, or loaded with pressure. The reality is far less intimidating. With a clear framework and the right preparation, you can arrive at a valuation that is credible, defensible, and aligned with what buyers, investors and HMRC will expect.

It’s also worth saying upfront: valuation is not a one-size-fits-all exercise. The right approach, and even the right number, can vary depending on why you’re valuing the business, whether that’s for a sale, a fundraise, a tax purpose, an employee share option scheme, or an internal share restructure.

This article explains how business valuation typically works in the UK, the methods that are actually used in real transactions, and the legal factors that can quietly add to or erode value.

When Valuation Really Matters

Valuation isn’t just something you deal with at exit. You’ll need a considered view of value at several points in the life of a business, including:

• Selling all or part of the business
• Bringing in investors or lenders
• Issuing, transferring or buying back shares
• Implementing employee share schemes
• Resolving founder or shareholder disputes
• Succession and estate planning

Each situation looks at value through a slightly different lens. Buyers tend to focus on risk and cash generation, investors on growth and exit potential, and HMRC on tax fairness.

For tax purposes in particular, HMRC is generally concerned with “market value” — typically understood as the price that would be agreed between a willing buyer and a willing seller, dealing at arm’s length. That framing matters when valuations are later scrutinised.

The valuation itself may not change dramatically across these scenarios, but the justification and evidence behind it often will.

That story also feeds directly into legal documents such as heads of terms, investment agreements and sale contracts. When valuation and legal structure are aligned early, deals tend to move faster and with far less friction.

The Main Valuation Approaches Used in the UK

Despite the jargon, most SME valuations rely on a small number of established methods. The right one depends on your business model, maturity and purpose.

Earnings Multiples (EBITDA or SDE)

For profitable SMEs, this is the most common approach. A sustainable earnings figure is multiplied by a sector-appropriate multiple.

• EBITDA multiples are typically used for businesses with management depth and predictable operations.
• SDE multiples are common for owner-managed businesses, adjusting for owner pay and personal expenses.

This approach works because it reflects how buyers think about payback and return.

Discounted Cash Flow (DCF)

DCF looks at future cash flows and discounts them back to today to reflect risk. It’s useful where revenue visibility is strong, but highly sensitive to assumptions. For many SMEs, it’s best used as a sense-check rather than a standalone answer.

Market Comparables

Valuation is informed by recent transactions or comparable listed companies, adjusted for size, growth and risk. Revenue multiples are common in SaaS and high-growth models, with adjustments for churn and margins.

Asset-Based Valuation

This focuses on assets minus liabilities and is most relevant for asset-heavy or distressed businesses. For service businesses, it often understates goodwill and future earnings.

Early-Stage and Startup Approaches

Pre-profit businesses are usually valued based on market opportunity, traction, team strength and milestones rather than earnings. Expect a wider range and more negotiation.

Indicative Valuation Multiples by Sector (Context, Not a Price Tag)

Founders and SME owners often ask whether there are any “rules of thumb” when it comes to valuation. There are — but they need to be handled with care.

The table below shows illustrative EV/EBITDA multiple ranges seen in UK SME and lower mid-market transactions (roughly £1m–£10m EBITDA). These ranges are not guarantees and should not be treated as pricing guides. Actual outcomes vary depending on size, growth, risk, structure and why the valuation is being done (sale, investment or tax). Think of this as orientation, not an answer.

Indicative EBITDA multiples by sector (UK SMEs)

Sector / Industry	Typical EBITDA Multiple Range	What drives the top end of the range
Software & Technology / SaaS	8.0x – 12.0x	High recurring revenue, strong growth, low churn, high margins
IT Services & Managed Service Providers	7.0x – 8.5x	Long-term contracts, recurring revenue, sticky clients
Professional Services – Consulting	8.0x – 11.0x	Blue-chip clients, scalable teams, retainer-based work
Professional Services – Legal	5.0x – 9.0x	Diversified practice mix, institutional clients, low partner reliance
Professional Services – Accounting/Tax	5.0x – 8.0x	Recurring compliance fees, advisory mix, strong retention
Professional Services – Other (HR, niche)	5.5x – 9.0x	Niche expertise, contracted revenue, depth beyond founders
Healthcare & Medical Services	6.0x – 9.0x	Repeat demand, regulatory barriers, capacity constraints
E-commerce	6.0x – 9.0x	Brand strength, repeat customers, defensible traffic
Business Services (general B2B)	5.5x – 6.0x	Contracted revenue, low churn
Industrial & Manufacturing	5.0x – 5.5x	Specialisation, IP/tooling, long-term supply contracts

How founders and SME owners should actually read this table

The key takeaway is simple: Sector sets the range and risk determines where you land within it.

For professional services firms in particular, buyers and investors typically care less about the label on the door and more about:

• Revenue quality – retainers, subscriptions and repeat work outperform project-only revenue
• Client concentration – reliance on one or two key clients will usually push valuations down
• Founder or partner dependence – value increases materially when revenue is not tied to specific individuals
• Scalability of the team – documented processes and depth beyond the founders matter
• Legal and structural readiness – clean ownership, assignable contracts and documented IP

Two consulting or legal firms with the same EBITDA can attract very different multiples purely because one is better de-risked than the other.

This is why valuation isn’t just a financial exercise. In services businesses especially, legal structure and risk management often determine whether you achieve the top or bottom of a multiple range.

How to Work Out Your Business Value in Practice

In reality, most valuations triangulate using two or three methods to land on a sensible range. A stable consultancy may anchor on EBITDA. A fast-growing tech business might combine revenue multiples with a DCF cross-check. A tax valuation for a share scheme may apply different assumptions again.

A practical approach usually involves:

• Cleaning up and normalising your financials
• Choosing multiples grounded in evidence, not optimism
• Moving from enterprise value to equity value properly
• Defining working capital clearly
• Stress-testing assumptions with scenarios

What matters most is credibility. Buyers, investors and HMRC don’t expect perfection — they expect logic they can follow.

Why Legal Readiness Has a Direct Impact on Value

Two businesses with similar numbers can attract very different valuations. Often, the difference comes down to legal risk.

• Clean ownership and governance
• Transferable customer and supplier contracts
• Clear IP ownership
• Data protection and regulatory compliance
• Reduced reliance on single customers or founders

These issues don’t just affect diligence, they influence multiples, deal structure and negotiating leverage. Addressing them early is one of the most effective ways to protect value.

Turning Valuation into a Deal

Valuation only becomes real once it’s reflected in binding documents. That typically means:

• Agreeing headline terms in a term sheet or heads of terms
• Supporting the valuation through diligence
• Capturing price, structure and risk allocation in sale or investment agreements
• Aligning valuation logic with the chosen price mechanism

Clear drafting around warranties, indemnities and any earn-outs is essential to avoid post-deal disputes that can undermine value.

Final Thoughts

Valuation isn’t about finding a perfect number. It’s about understanding how value is created in your business, choosing an approach that fits the context, and removing avoidable risk before it shows up at the worst possible time.

If you’re a founder or SME owner, valuation can feel heavier than it should. Not because the maths is hard but because the decisions behind it matter.

At Impact Lawyers, we work alongside founders and business owners to:

• Sense-check valuations before they become “deal numbers”
• Identify legal and structural risks that quietly reduce multiples
• Help you prepare at your pace, not on someone else’s timeline

If you want a grounded, practical conversation about where your business really sits within a valuation range — and what would genuinely move it upwards — we’re here.

Speak to Kevin Withane (kevin.withane@impactlawyers.co.uk) at Impact Lawyers for a no-pressure, founder-to-founder chat.

 

 

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