Most acquirers can tell you the multiple they paid. Far fewer can tell you why the number they multiplied was the right one, or whether the value under it would survive a change of ownership. Valuing a business you want to buy is not one calculation — it is a sequence of tests, each of which can turn a good-looking price into a bad one. A multiple of earnings is where the exercise starts; it is nowhere near where it should end.
This guide is for UK operators and acquirers — multi-entity buyers in particular — who need to put a defensible number on a target before they commit to it. It works through the acquirer's method end to end: normalising the earnings so you are pricing a real business rather than a presented one, applying a multiple that reflects genuine risk, testing whether the intangible assets behind those earnings actually justify it, sanity-checking against comparable deals, modelling the purchase price allocation before completion, and separating what the business is worth to anyone from what it is worth specifically to you. It is the pricing companion to the wider buying a business hub.
Every acquisition valuation rests on a number — usually a measure of profit — that you then apply a multiple to. Get that base number wrong and no amount of care with the multiple will save you, because you are compounding an error rather than a fact. So the first discipline of valuing a target is to establish what the business actually earns, stripped of everything that flatters or distorts the presented accounts.
The measure most acquirers work from is Normalised EBITDA — earnings before interest, tax, depreciation and amortisation, adjusted to reflect the sustainable, ongoing economics of the business. Normalisation removes the noise: one-off gains and losses, the founder's above-market or below-market salary, personal expenses run through the company, related-party rent that would not survive a sale, and anything else that will not recur under your ownership. The output is a run-rate profit figure that a buyer can reasonably expect to inherit.
Normalisation cuts both ways, and honest buyers apply it in both directions. A seller's adjustments almost always add back costs to lift the number. A disciplined acquirer also adds costs the target has been avoiding — an under-market founder salary that a hired replacement will cost more, deferred maintenance, or an IT stack that needs investment. Price the business as it will run under you, not as it ran under a founder subsidising it.
The rigorous version of this exercise is a Quality of Earnings analysis — a structured review of whether reported profit is real, sustainable and cash-backed. A quality-of-earnings review asks not just "how much did they earn?" but "how confident can I be that this earning continues?" It scrutinises revenue recognition, customer concentration, margin trends, and the difference between accounting profit and actual cash generation. For a serious acquisition, it is the foundation the whole valuation is built on, and it is covered in more depth in the acquisition due diligence checklist.
The valuation is only as good as the earnings figure you multiply. Normalise the target's profit to a sustainable run-rate, apply adjustments in both directions, and treat quality of earnings — not the headline P&L — as the base of your valuation.
Once you have a defensible earnings figure, you apply a multiple to it to arrive at an enterprise value. The multiple is the market's shorthand for risk and growth: a higher multiple says "these earnings are safe and likely to grow"; a lower multiple says "these earnings are fragile or static". Understanding what moves the multiple is what separates a priced valuation from a guessed one.
For most private SMEs, valuation is expressed as a multiple of EBITDA, though smaller owner-managed businesses are often still traded on a multiple of adjusted profit or even seller's discretionary earnings. The multiple you can justify depends on the characteristics of the specific target, not on a sector rule of thumb pulled from a broker's brochure.
| Factor | Pushes the multiple up | Pushes the multiple down |
|---|---|---|
| Customer concentration | Diversified base, no client over ~10% | One or two clients are most of revenue |
| Revenue quality | Contracted, recurring, high retention | Project-based, one-off, churny |
| Growth | Consistent, evidenced organic growth | Flat or declining, or growth is unproven |
| Key-person dependency | Runs without the owner; second-tier management | The founder is the business |
| Margin resilience | Stable or improving, pricing power | Margin under pressure, no pricing power |
| Sector & scale | Larger, structurally attractive sector | Sub-scale, fragmented, cyclical |
| Documentation & systems | Processes documented, integrable | Tribal knowledge, undocumented |
Read that table again and a pattern emerges: almost every factor that moves the multiple is intangible. Customer relationships, brand strength, contract quality, management depth, documented process — these are the value drivers a buyer is really pricing when they argue over whether a business is worth five times earnings or seven. The multiple is not an abstract market number; it is a summary judgement about the quality of the assets that produce the earnings, most of which never appear on the target's balance sheet.
| Approach | How it works | Best for |
|---|---|---|
| Earnings multiple (EV/EBITDA) | Apply a market multiple to normalised EBITDA | Most established, profitable SMEs |
| Discounted cash flow (DCF) | Project future free cash flows, discount to present value | Businesses with predictable long-range cash flows |
| Comparable transactions | Infer a multiple from prices paid for similar businesses | Sanity-checking an earnings-multiple valuation |
| Asset-based | Value net assets; add a premium for goodwill | Asset-heavy or distressed situations |
In practice, a buyer triangulates: an earnings multiple gives the working number, a DCF tests whether the forward cash flows support it, and comparable transactions check it against what the market has actually paid. No single method is authoritative. The number you take into a negotiation should survive all three.
Here is the step most acquirers skip, and the one that most reliably prevents overpayment. You have a normalised earnings figure and a multiple that implies a price. The question that price is silently making a bet on is: will these earnings still be here in two years, once the founder has gone and the business belongs to you? That question is answered not by the P&L but by the intangible assets underneath it.
Roughly 90% of a modern private company's value is intangible — the part the statutory accounts barely record. When you pay seven times EBITDA, you are not really buying seven years of profit; you are buying the customer relationships, brand, contracts, people, processes and IP that generate that profit. If those assets transfer cleanly to you, the multiple is earned. If they walk out of the door on completion, you have paid a premium for earnings that are about to evaporate.
The lens we use to test this systematically is The Opagio 12 — twelve intangible value drivers that determine hidden enterprise value. Applied to a valuation, each driver becomes a question about whether the value you are paying for transfers to you or stays with the seller. This is not a separate diligence exercise bolted on after pricing; it is the thing that tells you whether your multiple is defensible.
| Value driver | What it tells you about the price |
|---|---|
| Brand & Reputation | Is the goodwill in the price the company's, or the founder's personal reputation? |
| Customer Capital | Are the relationships contracted and transferable, or personal and portable? |
| Human Capital | Who produces the earnings, and what does it cost to keep them after completion? |
| Organisational Capital | Are processes documented enough that the earnings survive without the seller? |
| Content & IP | Is the IP registered and owned, or borrowed — and does the price assume you own it? |
| Ecosystem & Partnerships | Do the supplier and channel contracts that underpin margin survive a change of control? |
A target that scores strongly across these drivers can justify a top-of-range multiple, because the earnings are genuinely durable. A target with strong headline numbers but weak intangibles — concentrated revenue, undocumented processes, a founder who holds every key relationship — should be priced at the bottom of the range or structured to protect you, however good last year's profit looked. The intangible test is what converts a market multiple into a justified one.
Opagio Intangibles is built to run exactly this test on an acquisition target. It identifies and classifies the target's intangible assets across Opagio 12, values them with recognised methods, flags transferability and change-of-control risk, and produces the Opagio Value Drivers Register™ — the evidence base for your valuation and the input for modelling the purchase price allocation. For multi-entity operators, it compares intangible strength across the group so you can price consistently across every deal. See how Opagio Intangibles values a target's intangibles.
For the deeper treatment of the intangible-asset side of diligence specifically, see how to audit intangible assets in M&A.
A valuation built purely from the inside — your earnings figure, your multiple, your DCF — can be internally consistent and still wrong, because it never touches what the market actually pays. Comparable transactions are the correction. They anchor your number to real prices paid for real businesses, and they are the discipline that stops a buyer talking themselves into a multiple the market would never support.
There are two kinds of comparable to weigh. Precedent transactions are prices paid for similar businesses in similar situations — the most useful, because they reflect what a buyer with your incentives actually paid. Trading comparables are the valuations of similar listed companies, useful for direction but usually needing a discount, because a private SME does not command the liquidity or scale premium of a public one. For a small private target you will also apply a private-company discount and, often, a small-company discount on top.
An acquirer valued a £2m-EBITDA facilities business at seven times earnings — £14m — on the strength of its recurring contracts. A scan of precedent deals showed comparable regional operators changing hands at four to five times. The gap was not an error to argue away; it was a signal. The target's contracts were strong, but its revenue sat with two clients, exactly the concentration that had pushed the comparable deals to the lower multiples. The buyer re-priced to five times and structured an earn-out on the retention of the two clients, so the higher number was only paid if the value it assumed proved real.
The point of comparables is not to override your analysis but to interrogate it. When your number and the market's number diverge, one of them is telling you something. Either you have found a genuine mispricing — a business the market has undervalued because it has not looked at the intangibles the way you have — or you are about to overpay. The honest acquirer treats a large gap as a question, not a vindication.
Most buyers think of Purchase Price Allocation (PPA) as an accounting formality that happens after the deal, when the auditors carve the price up across the acquired assets. Treating it that way is a missed opportunity. Modelling the allocation before completion tells you something the headline price cannot: what, specifically, you are buying, and how the accounting will look once you own it.
Under UK accounting on acquisition — IFRS 3, or FRS 102 Section 19 for most private groups — the price you pay is allocated across the identifiable assets acquired, including intangible assets that were never on the target's own balance sheet: customer relationships, brands, technology and contracts. Whatever the price exceeds the fair value of those identifiable assets becomes goodwill. So the allocation answers a question every acquirer should ask before signing: of the multiple I am paying, how much is buying identifiable, evidenced assets, and how much is buying unexplained goodwill?
Before completion, list the intangible assets the deal actually transfers — customer relationships, brand, technology, contracts, workforce. This is the same list the intangible test above produces.
Apply the standard approaches — relief-from-royalty for brands, multi-period excess earnings for customer relationships, cost or market where appropriate. This is what the post-deal PPA will require anyway; doing it early tells you what you are buying.
Subtract the fair value of identifiable assets from the price. A large residual goodwill figure is a flag: it means much of your multiple rests on value you cannot point to. Ask why before you pay it.
Model how the allocation lands on your balance sheet and your future earnings — amortisation of acquired intangibles, goodwill carried and tested for impairment. Know how the deal looks in your accounts before you commit to it.
Modelling the allocation early does two commercial things. It disciplines the price — if most of what you are paying resolves into unexplained goodwill rather than identifiable, evidenced assets, that is a reason to negotiate, not a rounding item. And it prepares you for the acquisition method accounting you will have to complete anyway, turning a post-deal scramble into a pre-deal decision. For the full mechanics of the allocation step, see how buyers allocate the purchase price and the complete PPA guide. This guide prices the target; the PPA guide owns the allocation itself.
Purchase price allocation is not just a post-deal accounting task — modelled before completion, it tells you how much of your price buys identifiable, evidenced intangible assets and how much is unexplained goodwill. A large goodwill residual is a pricing question, not a formality.
The final discipline of valuing a target is to hold two numbers in your head at once and never confuse them. The standalone value is what the business is worth to any competent buyer — its normalised earnings, at a defensible multiple, on its own merits. The value to you is that figure plus whatever the combination with your existing business creates: cost savings, cross-selling, a stronger negotiating position, capacity you no longer have to build. The difference between the two is Synergy Value.
The rule that keeps acquirers out of trouble is simple to state and hard to obey: base your valuation on standalone value, treat synergy as your upside, and never hand the whole of it to the seller in the price. The moment you pay the seller for synergies, you have transferred to them the value your own business creates through the deal. You did the work of building the platform those savings depend on; there is no reason the seller should capture the reward for it.
The synergies most often used to justify a stretch price are revenue synergies — the extra sales the combined business will supposedly win. They are the least certain kind, they arrive later and smaller than the model says, and they depend on customers behaving as you hope. If a deal only makes sense once you price in revenue synergies, you are not paying a full price — you are paying an optimistic one. Underwrite on cost synergies you control, and treat revenue upside as a bonus you did not pay for.
This is where standalone valuation, comparables and synergy analysis come together. The comparables tell you roughly what the standalone business is worth. Your intangible test tells you whether it sits at the top or bottom of that range. And your synergy model tells you the ceiling — the most you could rationally pay and still create value — which is a very different number from the most you should pay in a negotiation. Knowing all three, and keeping them distinct, is what lets an acquirer walk away from a deal at the right price rather than the emotional one.
Valuing a business you want to buy is not a formula you can outsource to a multiple. It is a chain of judgements, each of which can protect you from the last. Start with the earnings — normalise them, test their quality, and price the business as it will run under you. Apply a multiple, but understand that the multiple is a verdict on the intangible assets producing the earnings, so test those assets before you accept it. Sanity-check the whole number against what the market has actually paid. Model the purchase price allocation before completion, so you know how much of your price buys evidenced value and how much buys goodwill. And separate what the business is worth to anyone from what it is worth to you, so you never pay the seller for the value your own business creates.
If you are earlier in the journey, start with the buying a business hub and the acquisition due diligence checklist. When you have a target and need to know whether the value you are pricing is real and transferable, see how Opagio Intangibles values a target's intangibles — or review pricing — and put a defensible number on the deal before you commit to it. For the questions buyers ask most about valuing a target, see how to value a business to buy.
Ivan Gowan is Founder and CEO of Opagio. He spent twenty-five years in fintech, including at IG Group, before building Opagio to help operators see and evidence the intangible value in the businesses they own — and the ones they are about to buy. Meet the team.
Most of what you are paying for is intangible — and invisible on the seller’s accounts. Verify it before you complete.
A 20-second read on your target — can you answer all three?
The balance sheet shows you plant, stock and cash. It barely shows the brand, the customers, the people and the contracts — the intangible assets that produce most of a target's earnings. Here is the buyer's lens for seeing them.
Read more →
A step-by-step guide to the Cost approach to intangible asset valuation — the method used to value assembled workforce, internally developed software, and proprietary databases. Learn the difference between replacement and reproduction cost, the role of obsolescence and developer's profit, and how the Asset Valuator module in Opagio Intangibles runs a defensible Cost valuation.
Read more →
A step-by-step guide to the Multi-Period Excess Earnings Method (MPEEM) — the income approach used to value customer relationships, order backlog, and other primary income-producing intangibles. Learn the theory, the inputs, the contributory asset charges, and how the Asset Valuator module in Opagio Intangibles runs a defensible MPEEM valuation.
Read more →Get the latest insights on intangible asset growth and productivity delivered to your inbox.