Valuation basics, and the number a lender actually uses

Price, value and fundability are three different things

A business is worth what a buyer will pay for it. That is the only honest definition of value, and it explains why the same company can be worth materially more to one buyer than another: a trade buyer who can absorb the work into existing overhead is buying something different from an individual who has to replace the owner.

Price is what gets agreed. Fundability is whether a lender will advance against it, and it is decided by an entirely separate calculation that most buyers never see until their file is in credit. Deals fall over at that point more often than at any other, not because the business was bad but because the price was set with reference to the wrong number.

So the useful thing to understand early is not how to value a business precisely. It is how a lender rebuilds the earnings figure, because that rebuild sets the ceiling on the borrowing, and the borrowing sets the ceiling on the price.

The rebuild, step by step

Every acquisition lender does some version of this, whether or not the buyer has. It starts from the target's reported profit and produces a figure the debt can actually be serviced from.

Start with operating profit from the audited or prepared accounts, not from turnover and not from a management summary.
Strip out what will not repeat. A one-off contract, a grant, an insurance settlement, a gain on a disposal, an unusually good year in a cyclical market. Anything that will not be there next year comes out.
Remove the owner's own arrangements. Drawings above or below a market rate, a spouse on the payroll who does not work in the business, personal vehicles, a property owned by the owner and rented to the company at a rate nobody negotiated.
Put back what it will actually cost to run. A market salary for whoever will do the owner's job after completion. Rent at a proper commercial rate if the property arrangement changes. Any cost the business has been avoiding because the owner absorbed it personally.
Test it against cash. Profit is an opinion until it turns into cash. A business with rising debtors and a lengthening collection cycle has a profit figure that is not yet money.

The result is the adjusted earnings figure, and it is frequently a long way below the number the price was negotiated on. Everything a lender then decides, how much it will advance, what the covenants are, what the repayment schedule looks like, is built on that figure. The mechanics are set out in senior term debt.

Which adjustments survive, and which do not

Sellers and their accountants present adjusted earnings with a list of add-backs. Some are entirely legitimate. Others are optimism with a spreadsheet around it, and a lender separates them fairly quickly.

Usually accepted: genuine one-off legal or professional costs, a clearly identified one-off project, owner remuneration above market rate where the replacement cost is evidenced, personal expenditure run through the business and documented, and costs attached to a property arrangement that is demonstrably changing.

Usually challenged: "one-off" costs that appear in all three years, staff costs removed because the buyer intends to run leaner, savings from an integration that has not happened, a marketing budget cut on the assumption it was discretionary, and any adjustment that depends on the buyer doing something after completion. That last category is the important one: a lender assesses the business as it is, not as it is planned to become.

Where add-backs are heavy, expect them to be tested individually in diligence, with evidence rather than explanation. What that process covers is in due diligence.

Multiples, and what a convention is and is not

In most markets a price gets discussed as a multiple of something. In accountancy practices the convention is usually a multiple of recurring fee income. In trade services it is more often a multiple of adjusted earnings. Those are conventions of how deals are talked about in each market, and they are useful shorthand.

What a multiple is not is a valuation method. It is the output of a negotiation expressed as a ratio, and the figure that gets applied moves with the quality of what is underneath it. The factors that push it in either direction are consistent across sectors.

How much of the income recurs, and how it is evidenced. Contracted maintenance income under a signed agreement is worth more than the same revenue billed ad hoc.
Customer concentration. A business whose largest customer is a rounding error is a different asset from one where the top three are a third of the revenue.
Owner dependency. The single largest discount in owner-managed businesses, and the reason the deal is usually staged.
Whether the staff stay. In service businesses the people are the delivery mechanism for the revenue being bought.
Growth, and whether it is real. Growth in a market that is expanding reads differently from growth achieved by taking work at prices nobody can repeat.
Capital intensity. A business needing constant vehicle and equipment replacement converts less of its profit into cash available to service debt.

Anyone quoting a fixed multiple for a whole sector is describing an average of deals with different characteristics, which is not a valuation of the one in front of you.

The balance sheet, which is not a footnote

Earnings set the price. The balance sheet decides how much cash actually changes hands, and buyers who ignore it get an unpleasant surprise at completion.

Most share purchases are agreed on a cash-free, debt-free basis, meaning the seller takes the surplus cash and settles the borrowing, and the price is adjusted accordingly. Alongside that sits a normal working capital requirement: the level of stock, debtors and creditors the business needs to keep trading. The seller is expected to leave that behind, and the completion accounts adjust the price if the actual position differs from the agreed level.

These adjustments are not small, and they are settled after completion, which means the final price is not known on the day. Agreeing the mechanism precisely, including what counts as debt and how the normal working capital level is calculated, is worth more attention than it usually gets. Where the purchase is of assets rather than shares, work in progress and debtors are generally bought separately at or near book value, and the ageing repays careful reading.

Why the lender's answer differs from the seller's

A seller values the business on what it has produced. A lender values it on what it will produce under a new owner, with a new cost base and a repayment schedule attached. Those are genuinely different questions and both parties can be reasoning correctly.

There is also a cost of borrowing sitting underneath the whole calculation, and it is not the same for everybody.

In June 2026 the effective interest rate on new bank loans to SMEs was 6.36%, against 5.42% for UK private non-financial corporations as a whole. The same earnings therefore support less debt at SME pricing than at large-corporate pricing, which is part of why an SME buyer's affordable price is lower than a trade buyer's for the identical business, and why the identity of the lender who ends up looking at the file is worth real money.[1]

Testing a price before you agree it

The check that prevents most late renegotiations takes an hour. Take the rebuilt earnings figure. Subtract what the buyer needs to draw to live. Subtract the tax the business will pay. Subtract the capital expenditure it genuinely needs to keep operating, which is not the same as the depreciation line. What remains is what is available to service debt, and it has to do that with room left over for a bad quarter.

If the price only works with no headroom at all, it is not a price that survives normal life. Deferring part of it moves the problem into later years where the business has settled, which is one of the reasons staging is so common and is covered in deferred consideration and earn-outs.

What goes wrong

The price was agreed on turnover or gross fees. A perfectly normal market convention for setting a price, and a disaster if nobody worked out what is left after paying someone to do the work.

The add-backs were accepted at face value. A seller's adjusted figure is a starting position, and it is tested in diligence whether or not the buyer tested it first.

Nobody agreed the completion mechanism. Cash-free debt-free sounds precise and means nothing until both sides have defined debt and normal working capital in writing, before it goes into the heads of terms.

Capital expenditure was ignored. A fleet of vans at the end of its life is a cost the forecast has to carry in year one, and it does not appear in the profit figure.

The buyer's own salary was left out. A forecast where nobody is paid to run the business is not a forecast. Terms that appear in valuation discussions and nowhere else are in the glossary.

Finding out what the price will actually support

The gap between a price that has been agreed and a price that can be funded is the most expensive thing in an acquisition to discover late, because by then the seller has an expectation and the buyer has spent money.

We know this market and we know specific people who fund acquisitions in these sectors, so we can tell you how the earnings will be read and what that supports before the number is fixed.

Send us the accounts and the shape of the deal. We come back to you with who can fund it and what they will want to see.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.