When you’re looking to buy a business, the big question is always the same: what is it worth? Ask ten people and you’ll get ten answers. A seller will tell you what they need. A broker will tell you what sounds good. Friends and colleagues will throw out numbers they’ve seen in the press. None of those are reliable.
A proper valuation isn’t about guesswork, it’s about starting with facts. And that means looking at the two foundations of value: the earnings power of the business, and the assets and liabilities it carries. Together, these give you a range you can negotiate from with confidence.
Let’s break it down.
Step One: Understanding Enterprise Value
The first building block is enterprise value (EV). This is the number most often thrown around in the media: “Company X was acquired for ten times earnings.” It’s a shorthand that gives a sense of how much investors are willing to pay for the profit-making capacity of a business.
Enterprise value starts with EBITDA—earnings before interest, tax, depreciation and amortisation. Why EBITDA? Because it strips out factors that don’t tell you much about the core performance of the business. Interest and tax depend on financing and structure. Depreciation and amortisation are accounting adjustments, not cash. What’s left is a cleaner view of the operating profit.
Once you have EBITDA, you apply an industry multiple. This is where sector knowledge comes in. Multiples are higher in industries with growth, predictability, and strong margins. They’re lower in sectors where profits are volatile, competition is high, or capital demands are heavy.
For example:
Software-as-a-service (SaaS) companies with sticky subscriptions might sell for 8×–12× EBITDA.
Accountancy firms with recurring client fees might see 0.8×–1.2× recurring revenue, rather than EBITDA multiples.
Manufacturing firms in steady markets may trade at 3×–5× EBITDA.
The multiplier isn’t magic—it’s a shorthand for risk and return. The better the business, the higher the multiple it can command.
Step Two: Balance Sheet Reality
Enterprise value is only half the picture. Businesses also own and owe things, and those matter when you’re negotiating.
On the asset side, you’ve got cash, equipment, property, vehicles, and receivables. On the liability side, you’ve got debts, overdrafts, tax owed, trade creditors, and any other obligations.
The difference—assets minus liabilities—is your net asset value (NAV). This is the factual, black-and-white part of valuation. A bank balance belongs to the company, not the owner. A debt remains a debt on completion day. NAV is the reality check that grounds enterprise value in financial fact.
Putting It Together
A sound valuation adds these two parts together:
Enterprise Value (EBITDA × multiple) + Net Asset Value = Total Valuation Range
Here’s a practical example:
EBITDA: £100,000
Industry multiple: 2×–5×
Enterprise Value: £200,000–£500,000
Assets: £1,000,000
Liabilities: £500,000
Net Asset Value: £500,000
Add them together, and the business is realistically worth £700,000–£1,000,000.
That’s not a finger-in-the-air guess. It’s a range backed by the accounts. And that range gives you confidence to negotiate.
The Dangers of Skipping This Step
Too many buyers skip straight to heads of terms. They agree a price based on emotion or optimism, and only later discover the numbers don’t stack up. By then, they’re invested in the deal, and it becomes much harder to walk away.
Here are some of the most common mistakes:
Counting the seller’s cash as yours. Unless the deal explicitly transfers surplus cash, assume the owner will strip it out before completion.
Ignoring debt. Loans, leases, and credit card balances don’t disappear when you buy the shares—they become your responsibility.
Overvaluing assets. A van worth £40k when new might only fetch £15k on resale. Plant and machinery values often look good on paper but disappoint in reality.
Forgetting working capital. If the company is underfunded and you need to inject cash just to keep it running, that’s a hidden cost.
Every one of these oversights inflates the price you think you can pay. That’s why a disciplined approach is essential.
Case Study: The Mispriced Business
Not long ago, I worked with a client who wanted to buy a business listed at £1.2 million. On paper, it looked promising. But when we applied the enterprise value and balance sheet method, the true range was closer to £250,000.
The seller had built their price around “life goals,” not accounts. They wanted a figure that would fund their next chapter, and a broker had nodded along. The buyer was so keen they were ready to stretch their assumptions just to make it work.
Our valuation report provided a reality check. It didn’t say “don’t buy”—it said “be clear you’re overpaying if you do.” That’s a crucial difference. Sometimes buyers knowingly overpay because they can see synergies or contracts that will create value. But at least they’re making that decision with eyes open, not sleepwalking into it.
Why Neutrality Matters
Even if you know the formulas, emotion creeps in. Maybe it’s your first deal and you’re desperate to get it over the line. Maybe you’ve been chasing a business for months and you don’t want to lose it. Suddenly, the lower end of the range looks “too conservative,” and you start justifying the higher end.
That’s why it helps to have an independent party run the numbers. At OnPoint, we never ask what the seller wants until the report is finished. We don’t see heads of terms until after we’ve valued the business. That way, the report is completely neutral—rooted in the accounts, not in emotions.
Sometimes that neutrality saves buyers from disaster. Other times it gives them confidence to move quickly, knowing the numbers support the deal. Either way, it’s protection.
Beyond the Numbers
Enterprise value and balance sheet calculations give you the core. But a full valuation also considers:
Industry trends. Is regulation helping or hurting? (Think Grenfell’s impact on cladding firms, or new safety legislation creating demand for security businesses.)
Recurring vs one-off revenue. Predictable, contracted revenue is worth more than ad hoc sales.
Customer concentration. A business with one client making up 70% of turnover carries far more risk than one with hundreds of smaller accounts.
Management dependence. If the founder is the business, you’ll need to replace them—or risk losing value fast.
SWOT analysis. Strengths, weaknesses, opportunities, and threats all influence the multiple you can justify.
But you can’t layer these judgments on until you’ve built the foundation. That’s why enterprise value plus balance sheet is always the starting point.
The Bottom Line
Valuing a business doesn’t need to be a dark art. Strip away the sales talk, the personal wish lists, and the emotion, and what you’re left with is simple:
How much does the business earn (EBITDA)?
What’s an appropriate multiple for the industry?
What assets and liabilities does it carry?
Put those together and you’ve got a range that is defensible, practical, and realistic. That’s the number you negotiate from—not the one someone dreamed up because it “felt right.”
Call to Action
At OnPoint Accounting, we specialise in independent, neutral valuations that keep you grounded in reality. Our reports combine the numbers with sector insights, SWOT analysis, and practical advice—delivered fast, often within 48 hours.
👉 If you’re preparing to buy a business and want to know what it’s really worth, contact OnPoint Accounting today and get a valuation you can trust.
Please seek professional advice and guidance when considering implementing the content of this blog, and always advise the seller to seek independent advice.
To learn more about the financial due diligence process in buying a business, why not purchase the book “Buying a Business The Smart Way” By Johann Goree: https://amzn.eu/d/0anwcVBk
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