What is my company worth? Valuation methods for SMEs
Selling, bringing in a partner or planning succession all require knowing what the company is worth. Here are the most common methods and what drives value up or down.
The question usually comes at an important moment: an offer to buy, a partner who wants out, a family succession or the search for an investor. In every case, negotiating without a valuation means negotiating blind.
A valuation doesn't give an exact number, but a reasonable range based on recognised methods and explicit assumptions. These are the ones most often used for SMEs.
1. EBITDA multiple
This is the most widely used method in SME transactions. EBITDA is operating profit before interest, taxes, depreciation and amortisation: it approximates the business's ability to generate cash from its activity.
Enterprise value = normalised EBITDA × multiple
Two important points:
- Normalised EBITDA: it has to be cleaned of one-off income and costs, of the owner's salary if it isn't at market rate, and of personal expenses run through the company.
- The multiple depends on the sector, size, growth and risk. There's no universal multiple; it's based on comparable transactions.
Net financial debt (bank debt minus cash) is then subtracted to reach the value of the shares, which is what is actually being bought.
Illustrative example: with normalised EBITDA of €400,000 and a multiple of 5, enterprise value would be €2 million. With €300,000 of net financial debt, the equity value would be €1.7 million.
2. Market comparables
Similar companies or transactions (same sector, similar size) are analysed and their multiples applied. It's useful as a cross-check, although public information on SMEs is limited and every deal has its own particulars.
3. Adjusted book value
This starts from the equity on the balance sheet and adjusts assets and liabilities to their real value: property at market price, obsolete stock, bad debts, unrecorded liabilities. It makes sense for asset-heavy or low-profit companies, and sets a floor for the negotiation.
4. Discounted cash flow (DCF)
This projects cash flows for the coming years and brings them back to today's value using a discount rate that reflects risk (WACC). It's the most complete method, because it forces you to spell out the business plan, but also the most sensitive to assumptions: small changes in growth or in the rate move the result a lot.
Why it pays to combine methods
No method is perfect on its own. A good valuation combines several, works with scenarios (cautious, base and optimistic) and shows how value changes if sales, margin or the discount rate move. The result is a range you can defend in a negotiation.
What drives an SME's value up (or down)
- Recurring revenue rather than one-off sales.
- A diversified customer base: depending on two or three customers reduces value.
- Low dependence on the owner: if everything goes through the owner, the buyer takes on more risk.
- Stable margins and proven growth.
- Reliable financial information: tidy accounts and a dashboard with several years of data build trust and shorten negotiations.
That's why it pays to prepare the company well in advance: a couple of years of management control and clean numbers can have more impact on the price than any last-minute argument.
When to value your company
- A full or partial sale.
- Partners joining or leaving.
- Family succession or inheritance.
- Raising investment or financing.
- Management incentive plans.
If any of these apply, our business valuation service explains how we work. You can also tell us about your situation with no obligation.