How to Value a Business: 4 Methods for an SME

How to value a business: which value are you after?

Before you value a business, you need to know which figure you are looking for. Two notions come up constantly, and confusing them skews the whole discussion.

• Enterprise value: what the operating business itself is worth (the activity, the customers, the teams, the machinery), however it is financed.
• Equity value: what belongs to the shareholders. It is enterprise value minus net debt, that is, financial debt less available cash.

When a buyer talks about the price of the shares, equity value is what counts. A heavily indebted company can have a healthy enterprise value and equity that is worth very little.

To illustrate each method, let us take a fictional SME, Ateliers Durand: €8.2m of turnover, €1.1m of EBITDA (operating profit before depreciation and amortisation) and €0.6m of net debt.

Method 1: the sector EBITDA multiple

This is the most widely used method in SME sales, because it speaks the same language as buyers. You apply to the company's EBITDA a multiple observed on comparable companies in the same sector.

For Ateliers Durand, with a sector multiple of 5.9:

Step	Calculation	Result
Enterprise value	€1.1m × 5.9	€6.5m
Net debt	to be deducted	− €0.6m
Equity value	6.5 − 0.6	€5.9m

The multiple comes from two sources: listed companies in the same sector (trading comparables) and recent transactions involving similar companies. An unlisted SME is generally worth less than a large listed group in the same line of business: it is smaller, more dependent on a handful of people, and its shares are harder to resell. The multiple you choose should reflect that gap.

The strength of the method is its simplicity. Its limit is that it assumes the company looks like the average of its sector. An SME growing twice as fast as its competitors deserves better than the average multiple.

To go further, our trading comps model calculates the multiples of a sample of listed companies.

Method 2: the DCF, the value of future cash flows

The DCF (discounted cash flow) starts from a simple idea: a business is worth the cash it will generate in the future, brought back to today's value.

You proceed in three steps:

1. Forecast the cash flows for the next five years: EBITDA, less tax, capital expenditure and the increase in working capital.
2. Discount them at the cost of capital (the WACC), the return that lenders and shareholders expect for the risk they take. A euro in five years is worth less than a euro today.
3. Add a terminal value, which represents all the cash flows beyond the fifth year.

For Ateliers Durand, with a cost of capital of 10.8%, the DCF gives an equity value between €4.6m and €6.1m, depending on the growth assumptions.

The DCF has one advantage: it forces you to spell out your assumptions. Its weakness is the flip side of that strength: a one-point change in the cost of capital, up or down, moves the result markedly, and the terminal value often accounts for more than half of the total. That is why it is always presented as a range.

The WACC calculator helps you set the rate, and the DCF model details every cash flow, year by year. For the full workings, see our guide to the WACC calculation.

Method 3: adjusted net asset value

The asset-based approach looks at what the company owns rather than what it earns. You start from the shareholders' equity on the balance sheet, then restate each item at its real value: a warehouse bought twenty years ago, stock that is partly unsaleable, a doubtful receivable.

It suits:

• companies that mainly hold assets (holding companies, property companies);
• low-profit businesses, whose value lies in their assets rather than their earnings;
• as a floor for negotiation: a profitable company is rarely worth less than its adjusted net asset value.

For a services or light-manufacturing SME like Ateliers Durand, it generally understates the value, because it ignores the customer base and the know-how.

Method 4: the earnings yield method

The earnings yield method capitalises a recurring profit or the dividends paid: you divide annual profit by an expected rate of return. A profit of €600k capitalised at 10% gives €6m.

It is simple, but very sensitive to the rate chosen and the profit used. It is mainly used to cross-check the other methods, particularly in asset and tax valuations (gifts, inheritances).

The four methods at a glance

Method	What it measures	When to use it	Main limit
EBITDA multiple	Value according to the market	Sale of a profitable SME	Assumes an "average" company
DCF	Discounted future cash flows	Growing company, solid business plan	Very sensitive to the rate and the terminal value
Adjusted net asset value	What the company owns	Holding company, property, low profitability	Ignores the customer base and know-how
Earnings yield	Capitalised profit	Cross-checking, asset valuation	Relies on a single rate

What pushes the value of an SME up or down

With identical figures, two SMEs can be worth very different amounts. A buyer looks closely at:

• dependence on the owner: if customers follow the founder, the value leaves with them;
• customer concentration: a customer accounting for 40% of turnover is a risk;
• recurring revenue: multi-year contracts, subscriptions, loyal customers;
• growth and margins, compared with those of the sector;
• working capital requirements: a company that ties up a lot of cash in stock and receivables is worth less;
• the quality of the accounts: clear, regular and well-kept accounts reassure buyers and speed up negotiation.

A range, not a single figure

No method gives "the" value. Good practice is to cross-check two or three of them and find the range where they overlap.

For Ateliers Durand, the sector multiple gives an equity value between €4.8m and €7.1m, and the DCF between €4.6m and €6.1m. The two methods overlap between €4.8m and €6.1m: that is the most solid range with which to open a discussion.

Bear in mind, too, that value is not price. Price is negotiated: it depends on the number of interested buyers, the synergies they hope for, the warranties requested and the timetable.

Value your company in one minute

Bridgesheet applies these methods for you. Type in the company's name or its SIREN (the French company registration number): the site fetches its published accounts and the market data for its sector, then displays a value range by DCF and by multiple, explained in plain English. If the accounts are confidential, you can enter your own figures.

The on-screen result is free and requires no account. If you need to present the result to a partner, a banker or a buyer, the valuation pack brings together a PDF report, a PowerPoint presentation and the pre-filled Excel model.