Valuing SMEs - Four drivers affecting SME values

By UHY Hacker Young Manchester

22 Oct 2021

Website
uhy-hy-colour-a4.jpg

The value of a business can often be a tricky thing to pin down and often the old adage that a business is worth what someone is willing to pay for it does ring true.

Unfortunately this may not be of great help to business owners looking to find at least an approximate fair market value their company may achieve. It can become even more difficult in the world of SMEs as information is not about deals involving similar deals is not always available and metrics such as P/E ratios are not really relevant as they typically used for valuing large listed companies.

However, as SMEs are typically valued on a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) there are a number of factors that have been shown to influence the multiple that can be achieved.

Research has shown that the average EBITDA multiple for UK SMEs across all sectors is approximately 5.5x to 6x (as per the recently released Dealsuite.com M&A Monitor H1-2021 report and the UK200 Group SME Valuation Index). There are some reports that show higher average multiples being paid for UK companies but these will include larger deals for larger companies which often skew the results.

This leads us to the first factor that can affect EBITDA multiples for SMEs which is sector. The multiple figure stated above is across all sectors. However, the previously mentioned Dealsuite report shows that average multiples in sectors can vary from 3.65, in the hospitality and tourism sector, to 8.65 seen in the IT services and software development sector.

The second factor I would like to note is size. Recent research has shown that average multiples for companies with an EBITDA of £5m are 89% higher than those with an EBITDA of £200,000. To add to this, anecdotal evidence from the world of M&A would suggest that more parties become interested at the magic £1m+ EBITDA level. It goes without saying that the more people are interested the greater the potential for higher multiples to be paid.

Factor number three is something that I have blogged about before as it has begun to come into the thinking of buyers across all sectors; ESG (Environmental, Social and Governance). A recent survey suggested that 69% of advisors recognise the relevance of ESG, 11% have already seen and effect on valuations and 84% expect future valuations to be impacted by ESG.

The final factor I would like to focus on in this blog is a control a premium. Again the research mentioned above shows that on average a buyer will pay 17% more for a company if they are acquiring a controlling interest. Often, when compiling valuation reports a minority discount is applied to the value of shares if only a minority are being valued.

So there are the four factors I wanted to concentrate on in this blog. However, it must be noted that there are a number of other factors that can affect the value of a business such as customer concentration, second tier management and contracted revenue to name a few.

If you would like a quick initial discussion about the potential value of your business or potentially planning an exit strategy please feel free to get in touch.

Latest news

1

Councils back Combined County Authority proposals Lancashire Devolution

Councils back Combined County Authority proposals

18 Mar 2024

2

Red Rose Awards honours best of Lancashire business Red Rose Awards Winners 2024

Red Rose Awards honours best of Lancashire business

15 Mar 2024

3

RfM Transform helps business park achieve carbon negative status HR Trends from RfM Transform (9).png.png

RfM Transform helps business park achieve carbon negative status

19 Mar 2024

4

Derelict Darwen site transformed into fully-occupied business park Mill Bank Business Park

Derelict Darwen site transformed into fully-occupied business park

18 Mar 2024

5

Ways to increase flexibility in the workplace Flexible Working LBV.jpg.jpg

Ways to increase flexibility in the workplace

18 Mar 2024

Background image for hub sign up block

LBV Hub

Reach 50,000 members of the Lancashire business community

Post your news
Post your events
Post your offers
Company profile
Social reach
Magazine coverage
Sign-up
Events
LBV115 Magazine Launch Event
DSC9389
Networking
20 Mar 2024

LBV115 Magazine Launch Event

Delta Hotels by Preston Marriott, Garstang Road, Broughton, PR3 5JB

16:00 - 18:00

Business Networking in Blackburn - BNI Vista
EVENT LISTING SIZING Vista.png.png
LBV Hub Networking
19 Mar 2024

Business Networking in Blackburn - BNI Vista

Hampton by Hilton, 2 Frontier Ave, Blackburn, BB1 3AL

06:45 - 08:30

Business Networking in Chorley - BNI Endeavour
EVENT LISTING SIZING Endeavour.png.png
LBV Hub Networking
19 Mar 2024

Business Networking in Chorley - BNI Endeavour

Oak Royal, Bury Lane, Chorley, PR6 8SW

06:30 - 08:30

Business Networking in Accrington - BNI Zeus
EVENT LISTING SIZING Zeus.png.png
LBV Hub Networking
20 Mar 2024

Business Networking in Accrington - BNI Zeus

The Mill House, Corn Mill Yard, Accrington, BB5 5HX

06:45 - 08:30

Business Networking in Lancaster - Eden Business Network
EVENT LISTING Eden Business Network.png.png
LBV Hub Networking
20 Mar 2024

Business Networking in Lancaster - Eden Business Network

The Borough, 3 Dalton Square, Lancaster, LA1 1PP

18:30 - 20:30

North West Apprenticeship & Careers Expo 2024
APP EXPO 23 IMAGE.jpg.jpg
LBV Hub Exhibitions
20 Mar 2024

North West Apprenticeship & Careers Expo 2024

Sir Tom Finney Sports Centre, Preston, PR1 2HE

12:00 - 19:00

Business Networking in Preston - BNI Diamond
EVENT LISTING BNI Diamond.png.png
LBV Hub Networking
20 Mar 2024

Business Networking in Preston - BNI Diamond

The Marriot Hotel, Garstang Road, Broughton, PR3 5JB

07:15 - 09:00

The Allo Allo Comedy Dining Experience
Allo-Allo-Comedy-Dinner-Crow-Wood-Burnley.jpg.jpg
LBV Hub Social
21 Mar 2024 - 21 Mar 2024

The Allo Allo Comedy Dining Experience

Crow Wood Hotel & Spa, Burnley, BB12 0RT

18:45 - 23:00

Creative Lancashire PowWow networking
Creative Lancashire icon.jpg.jpg
LBV Hub Networking
21 Mar 2024

Creative Lancashire PowWow networking

Society1 Coworking Space, Preston, PR1 3LT

17:30 - 19:30

Business Networking in Lancaster - BNI Castle
EVENT LISTING BNI Castle.png.png
LBV Hub Networking
21 Mar 2024

Business Networking in Lancaster - BNI Castle

Vale of Lune RUFC, Powder House Lane, Lancaster, LA1 2TT

06:45 - 08:30

Business Networking in Burnley - BNI Kudos
EVENT LISTING BNI Kudos.png.png
LBV Hub Networking
21 Mar 2024

Business Networking in Burnley - BNI Kudos

Prairie Sports Village, Windemere Avenue, Burnley, BB10 2FU

06:45 - 08:30

Business Networking in Preston - BNI Brunch
EVENT LISTING SIZING Brunch .png.png
LBV Hub Networking
22 Mar 2024

Business Networking in Preston - BNI Brunch

Samlesbury Preston Hotel, Preston New Road, Preston, PR5 0UL

09:30 - 11:00

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more Lbv115 Online Graphic
Subscribe now

Weekly news bulletin