A small business is usually valued in three ways and the results compared: an earnings multiple applied to sustainable profit, the value of its net assets, and the present value of its future cash flows. Net assets on a break up basis give a floor; earnings and cash flow methods capture goodwill. For a minority stake in a private company, a substantial discount from a proportionate share of the whole is normal.

Why is there no single right value?

A valuation is an estimate of what a buyer would pay, and that depends on who is buying, what they are buying and why. A trade buyer who can cut duplicated costs may pay more than a financial investor. A 100% holding carries control of the business and its assets; a 10% holding in a private company carries little more than a vote and whatever dividends the majority choose to pay. ACCA’s study material makes the point directly: because minority holders have little power, a 20% share should be worth less than 20% of the whole, and an 80% share more than 80%.

Tax law adds its own definition. For capital gains, section 272 of the Taxation of Chargeable Gains Act 1992 defines market value as the price the assets might reasonably be expected to fetch on a sale in the open market, and section 160 of the Inheritance Tax Act 1984 uses similar wording. HMRC’s Shares and Assets Valuation Manual (SVM113020) explains that this assumes a hypothetical sale between a willing, reasonable buyer and seller, but in the real market conditions at the valuation date. For the tax side, see CGT valuations and valuing shares for employee schemes.

How does the earnings multiple method work?

Most owner managed businesses change hands on a multiple of profit. The steps are:

  1. Find maintainable earnings. Start with recent profits and strip out one off items. Adjust owners’ pay to a market rate: if the owner takes a small salary and large dividends, a buyer will need to pay a manager properly, so profits fall; if the owner draws far above market rate, profits rise. HMRC’s summary of the Marks v Sherred case (SVM113130) records an adjustment for a high level of directors’ remuneration.
  2. Look forward, not back. A buyer is paying for future earnings. ACCA warns that sellers can flatter current profit by cutting discretionary costs such as maintenance, training and recruitment, leaving the buyer with catch up spending later.
  3. Choose a multiple. The price earnings (P/E) ratio is share price divided by earnings per share. Comparable listed company P/E ratios are a common starting point, but ACCA notes that unquoted companies are normally valued at a reduction of about a third to a half from the listed figure, reflecting their smaller size, greater risk and the difficulty of selling the shares.
  4. Multiply. Value equals maintainable earnings times the chosen multiple. Use an after tax multiple with after tax earnings, and a pre tax multiple with pre tax earnings, never a mix.

The P/E approach suits a controlling stake, because a controlling shareholder can decide what to do with the earnings. A minority holder only receives dividends, so for small holdings a dividend yield basis may be more realistic.

When are net asset values used?

An asset basis values the equity as the business’s assets less its liabilities. ACCA identifies three versions:

  • Book value, taken from the balance sheet. ACCA describes this as of little practical use, because fixed assets are shown at historical cost less depreciation.
  • Net realisable value, the cash left if assets were sold and liabilities paid, after closure costs. This is the most useful, because it sets the lowest price a seller should accept.
  • Replacement value, what it would cost to set up the business now. It is hard to estimate for assets of mixed ages.

Asset values miss goodwill. FRS 102 paragraph 18.8C prohibits recognising internally generated goodwill, brands or customer lists, so a profitable service business may show modest net assets despite being worth several times that amount. Asset values come to the fore for property and investment companies, for loss making businesses and as a floor in negotiations. See also business combinations and goodwill for how a buyer accounts for the premium it pays.

How is a discounted cash flow valuation built?

A discounted cash flow (DCF) valuation applies the net present value technique to the whole business. Forecast free cash flow, meaning operating cash after tax and after the capital spending needed to keep the business competitive, for a period of typically three to five years. Then add a terminal value for the years beyond, usually by assuming steady growth for ever. ACCA’s Advanced Financial Management article shows the growing perpetuity formula: next year’s cash flow divided by (discount rate minus growth rate), discounted back from the end of the forecast period.

Two points need care. If cash flows are before interest, discount them at a rate reflecting both debt and equity, then deduct the business’s debt to arrive at the equity value. And because the terminal value often makes up most of the answer, small changes in the growth or discount rate move the result a long way, so always present a range using sensitivity analysis.

What does a worked example look like?

Illustration only. A consultancy company reports profit after tax of £120,000. The owner draws a £12,000 salary; replacing her with a manager would cost £30,000 more, reducing after tax profit to about £97,500, which a buyer accepts as maintainable.

Method Working Value (£)
Earnings multiple Listed sector P/E of 12, reduced by a third to a half for unquoted status, gives 6 to 8; × £97,500 585,000 to 780,000
Net realisable assets Book net assets £210,000, less £20,000 of doubtful debts, less £15,000 closure costs 175,000
Discounted cash flow Free cash flow £100,000 next year, growing 2% a year, discounted at 16%: 100,000 ÷ (0.16 minus 0.02), no debt 714,000

The asset figure is the floor. The earnings and DCF figures overlap at around £585,000 to £780,000, which is the negotiating range for the whole company. A 10% minority holding would be worth considerably less than 10% of that.

How are minority holdings discounted?

There is no fixed scale. HMRC’s manual (SVM113030) stresses that court decisions on discounts for minority holdings or unmarketability are not binding law and depend on their own facts and evidence. The decided cases summarised at SVM113130 still show the size of discounts involved: in Clark v Green a 70% discount was applied to the comparable quoted P/E for a 3.16% holding, while in Couch v Caton the estimated company value was discounted by 50% for a 14.2% holding, the largest single block. The holding’s voting power, any shareholder agreement, the dividend record and whether a sale of the whole company is in prospect all affect the answer.

What mistakes come up most often?

  • Applying a listed company multiple to a small private company without adjustment.
  • Using reported profit without normalising owners’ pay, personal expenses or one off items.
  • Mixing a pre tax multiple with after tax profit, or an enterprise value with an equity value.
  • Valuing a minority stake as a simple percentage of the whole.
  • Relying on a single method. Triangulating earnings, assets and cash flow exposes unrealistic assumptions.
  • Ignoring how the price is paid. Deferred consideration and earn outs shift risk and have their own tax rules; see earn outs and deferred consideration.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.