There are many ways to define a job versus a business, but for me, it boils down to one simple question: Could you sell your business?

If not, then you have a job.

This perspective often triggers many business owners. So let me be clear: if you know you have a job and you are happy with that, then all is good.

This job might provide you with better pay and more freedom than any traditional employment. I am not here to judge.

However, I often see bitter disappointment in those owners who, ultimately having a job, try to sell their business and find it unsellable or worthless to anyone other than themselves.

Unfortunately, I see this disappointment regularly because most business owners don’t understand how to value a business or what a buyer might want.

This is another topic I could write a whole book on and may do one day ( I need to finish the current book first, though!).

Let’s take a high-level look at how a business is valued and sold.

EBITDA

Accounting Jargon that stands for Earnings Before Interest, Tax, Depreciation and Amortisation.

Any clearer? Probably not.

Start with your very bottom-line Net Profit. Add back the Corporation tax. Add back any interest you paid on finance (loans, etc.). Add back Depreciation.

Depreciation and Amortisation are essentially the same thing. They are the way accountants spread the cost of your big purchases over multiple years For example that £30k machine you bought, spread over 10 years, shows up in your P+L as £3k per year - this is depreciation.

Amortisation is the same concept but for intangible assets - these are things you can not physically touch but still hold value like Intellectual Property, Copyrights, Patents, brands, etc.

Multiplier

To come up with a price to buy your business. A buyer will take your adjusted EBITA figure and apply a multiplier.

If your adjusted EBITDA is £1m and the multiplier is 3x then they will offer you £3m.

The concept is pretty easy to grasp. The issue is, what multiples do you use?

This is where negotiations take place.

Put yourself in the buyer's shoes. If EBITDA remains the same after they buy, the multiple is how many years they need to wait to break even.

Let’s say you wanted a multiple of 10. If you were the buyer, would you take on all that risk and run the business for 10 years before breaking even? I would suggest not…

A multiple of 2-4 is most common for most small businesses.

If you are a bigger business, say profits over £1m a year, and growing very quickly then you might hit 6-8.

Unless you are a super fast-growing tech business, we need to get real about expecting double-digit multiples—it isn’t going to happen!

Data on small business sales is very hard to come by, but I would be amazed if the average multiple was above 3.

All kinds of factors will impact the multiple, including the riskiness of the business, the sector you operate in, your growth or decline trajectory, and synergies with the buyer's business as a starting point.

Adjusted EBITDA

Although we start with the calculation above to determine our EBITDA, we make various adjustments to this figure before applying the multiple.

This is where owners get caught out!

You might strip out expenses to increase your EBITDA if they are not strictly needed in the business moving forward. For example, if you have a company car as a director.

It also goes the other way. Buyers will add in expenses that are not currently sitting in your P+L but that they will need to run the business without you. The main expense here is a market rate (or two) salary to replace you.

You are probably paying yourself a minimum salary and taking most of your money through dividends. Dividends do not impact your EBITDA.

Let's say you are showing an EBITDA of £80k. You work 60-80 hours per week in the business across various roles, but you handle all the sales and deliver most of the billable work. Your current salary in the business is just £12k

Someone buying your business would need to hire a salesperson, let's say £40k. They need an expert to deliver the billable work, £50k. Depending on the size of the team, they may also need to hire a manager, say another £40k.

So now your £80k EBITDA is more like a loss of £38k… It wouldn’t matter what multiplier you agree on; your business to this buyer would be worthless - you have a job, not a business.

The list of adjustments in bigger, more complex deals can be large, but you should also be aware that most buyers will take an average of your last two or three years’ EBITDA. Basing a high valuation on last year’s accounts only because it was a great year will probably get pushback from the buyer.

Buyers and Sellers of the business have conflicting agendas here, so expect some negotiations back and forth.

Other Ways to Value a Business

Applying a multiple of EBITDA is by far the most common method for small businesses, but it isn’t the only one.

Certain sectors have different standards of valuation. For example, Accountancy businesses are traditionally valued at a multiple of 0.8-1.5 of turnover, with the market only more recently looking towards EBITDA.

Don’t get me started on tech valuations; sometimes, they defy logic. Half of the time, they are not profitable, so you can’t use EBITA. Instead, they apply a multiple to turnover. These multiple are often much higher as, in theory, they are easier to achieve scale.

Then you have businesses that are Asset-based, like property companies—these valuations might be based on the market rate of the assets owned by the business rather than any other method.