Why Is Business Valuation So Complex?
A business is not a house. There is no listing platform where you can look up comparable properties. The value of your business depends on dozens of factors: your sector, your growth potential, the dependency on you as a person, the quality of your team, the state of your contracts, and much more.
Moreover, there is a difference between the theoretical value and what a buyer is actually willing to pay. Valuation is therefore always a combination of analysis and negotiation.
The Three Most Common Valuation Methods
1. The EBITDA Multiple
This is the most commonly used method in SME practice. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation: the operating profit before interest, taxes, and depreciation charges.
The formula is straightforward: take your normalised EBITDA and multiply it by a multiple. For SMEs, this multiple typically ranges between 3x and 7x, depending on the type of business.
Factors that influence the multiple include sector (software and technology companies achieve higher multiples than traditional retail), growth trajectory, recurring revenue from subscriptions and long-term contracts, owner independence, and overall company size. Larger businesses generally command higher multiples.
Example
If your business has a normalised EBITDA of EUR 500,000 and the prevailing multiple in your sector is 5x, the indicative enterprise value is EUR 2.5 million. Note: this is the enterprise value, not what you net. Debts are subtracted and cash is added.
2. The Discounted Cash Flow Method (DCF)
The DCF method calculates the value of your business based on future free cash flows, discounted back to today. The idea is: a euro you earn in three years is worth less today than a euro you earn now.
This method is theoretically the most pure, but also the most sensitive to assumptions. Small changes in growth percentages or the discount rate can significantly affect the outcome. In practice, DCF is often used as a supplementary check on the multiple method.
3. The Comparables Method
Here, your business is compared with recent transactions of comparable companies. If a competing business of similar size and profitability was recently sold for 5x EBITDA, that provides a good indication for your valuation.
The disadvantage is that transaction data in the SME sector is often not public. However, an experienced adviser can work with this based on their network and databases.
What Is "Normalised" EBITDA?
In a valuation, the EBITDA as stated in the annual accounts is almost never used directly. The profit is first normalised: corrected for incidental or personal items.
Common normalisations include owner salary adjustments (if you pay yourself significantly more or less than a market-rate salary), one-off costs such as legal disputes or relocations, private expenses through the business, and above- or below-average investment levels.
Normalising the EBITDA is often the most debated part of a valuation. It is therefore advisable to do this with an independent adviser.
Five Factors That Increase Your Business Value
Regardless of the method used, there are a number of factors that almost always have a positive effect on the value of your business:
1. Reduce your indispensability
If the business cannot run without you, the risk for a buyer is greater and the value is lower. Invest in a management layer and document your processes.
2. Build recurring revenue
Contracts, subscriptions, and long-term client relationships make your cash flows more predictable and your business more valuable.
3. Make your administration bulletproof
A buyer wants confidence in the numbers. Ensure clean bookkeeping, preferably audited by a reputable accounting firm.
4. Diversify your client base
If one client represents more than 20% of your revenue, that is a risk that buyers factor into a lower price.
5. Start early
The best value enhancement is achieved in the two to three years before a sale. Do not wait until the moment arrives; start optimising now.
What Can You Expect in Terms of Valuation?
To give you a rough indication: for healthy Dutch SMEs with an EBITDA between EUR 300,000 and EUR 2 million, buyers typically apply multiples in the following ranges:
| Sector | Typical Multiple |
|---|---|
| Services (general) | 4x – 6x EBITDA |
| IT and software | 6x – 10x EBITDA |
| Manufacturing and industry | 4x – 6x EBITDA |
| Construction and installation | 3x – 5x EBITDA |
| Healthcare | 5x – 8x EBITDA |
These are indicative ranges. The exact multiple depends on the specific characteristics of your business and the market conditions at the time of sale.
Hidde van den Bergh is the founder of Belle Haven Capital. With a background in strategy consulting, M&A execution, and AI implementation, he partners with SME owners to acquire, invest in, and build exceptional businesses. Want to know what your business is worth? Request a free indicative valuation.