Why Your Profit Figure Is Lying to You (And What Buyers Actually Value)

When it comes to value, most business owners are focused on profit, pure and simple. But buyers look at more than just the bottom line. So what do your business numbers tell a buyer about the saleability and value of your business? Let’s look at an example:

Your last year’s accounts show £620,000 profit.

You think: “At 4x multiple, my business is worth £2.48 million.”

A buyer looks at the same accounts and thinks: “At 4x multiple, this business is worth £3.34 million.”

Same accounts. Different numbers. £860,000 difference.

Why?

Because buyers don’t value your reported profit. They value normalised EBITDA. And most business owners calculate it wrong.

What EBITDA Actually Means

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation.

According to Lansley Commercial’s 2025 analysis of UK business sales, most small businesses sell for 1.5x to 3x adjusted earnings—specifically, adjusted EBITDA.

But here’s what matters: the word “adjusted.”

Buyers don’t use your reported profit. They adjust it to reflect true operational earning power.

Why Reported Profit Is Wrong for Value

Your accounts are prepared for HMRC. They show profit after everything you’re legally allowed to deduct.

But buyers ask different questions:

“What would this business earn under normal ownership?”

“Which expenses won’t exist after I buy it?”

“Are there one-off costs or revenues distorted last year’s results?”

According to Wise’s 2025 UK business valuation guide, businesses sell for multiples of EBITDA, with ranges varying by size:

• Owner-managed businesses: 0 to 2.5x EBITDA
• Small businesses (profits to £500K): 2 to 7x EBITDA
• Small businesses (profits over £500K): 3 to 10x EBITDA

The multiple applies to normalised EBITDA, not reported profit.

Get EBITDA wrong, and your entire valuation is wrong.

The Seven Critical Adjustments That Create Value

Here’s how to calculate normalised EBITDA properly.

Start with: Profit Before Tax

Last year’s accounts: £620,000 profit before tax

Add Back: Interest, Tax, Depreciation, Amortisation

These are accounting/financing items, not operational earnings.

• Interest paid: £12,000 (add back)
• Tax: £0 (we started with profit before tax)
• Depreciation: £48,000 (add back)
• Amortisation: £8,000 (add back)

= EBITDA: £688,000

But we’re not done. Now come the normalisation adjustments.

Adjustment 1: Owner Compensation

You pay yourself £180,000 annually (salary + dividends).

Question: “What would I pay a hired CEO to run this business?”

Market rate for your industry and business size: £95,000.

Adjustment: Add back £85,000

Logic: A buyer doesn’t need to pay £180,000 for a CEO. They’ll pay market rate. The difference is additional earnings.

Adjustment 2: Personal Expenses

Review what runs through the business that’s personal:

• Company car you use 80% personally: £8,000 annual cost
• Private health insurance for you and family: £3,500
• Mobile phone contract for spouse: £1,200
• Gym membership: £1,800
• Professional subscriptions you don’t need: £1,500

Total personal expenses: £16,000

Adjustment: Add back £16,000

Logic: Buyer won’t have these expenses. They’re effectively owner benefits disguised as business costs.

Adjustment 3: One-Off Costs

Last year included non-recurring expenses:

• Office relocation: £45,000
• Legal dispute (now resolved): £22,000
• Restructuring redundancies: £18,000

Total one-off costs: £85,000

Adjustment: Add back £85,000

Logic: These won’t recur. They distort the business’s normal earning power.

Adjustment 4: Non-Operating Income

You own the building. Business pays you £18,000 annual rent.

This rent isn’t operational income from the business—it’s property income.

Adjustment: Remove £18,000

Logic: Buyer is buying the business, not the property. Separate the two.

Adjustment 5: Discretionary Expenses

Review expenses that were choices, not necessities:

• Excessive entertaining and hospitality: £12,000
• Charitable donations: £5,000
• Sponsorships with no ROI: £8,000

Total discretionary: £25,000

Decision: Add back if buyer wouldn’t spend this. Keep if they would.

Conservative approach: Add back £15,000 (the clearly excessive portion).

Adjustment: Add back £15,000

Adjustment 6: Related Party Transactions

Your spouse runs marketing, paid £65,000 annually.

Market rate for equivalent role: £42,000.

Adjustment: Add back £23,000

Logic: Buyer pays market rate, not family rate.

Adjustment 7: Deferred Maintenance Catch-Up

You’ve delayed equipment replacement and facility maintenance.

Estimated cost to bring everything to proper standard: £35,000.

Adjustment: Remove £35,000

Logic: Buyer will face this cost. It reduces maintainable earnings.

The Complete Calculation

Reported Profit Before Tax: £620,000

Add back:

• Interest: £12,000
• Depreciation: £48,000
• Amortisation: £8,000

= EBITDA: £688,000

Normalisation adjustments:

• Owner compensation: £85,000
• Personal expenses: £16,000
• One-off costs: £85,000
• Discretionary spending: £15,000
• Related party: £23,000

• Non-operating income: (£18,000)
• Deferred maintenance: (£35,000)

= Normalised EBITDA: £859,000

Your reported profit: £620,000 Your normalised EBITDA: £859,000

Difference: £239,000

At 4x multiple:

• Reported profit valuation: £2,480,000
• Normalised EBITDA valuation: £3,436,000

Value difference: £956,000

Same business. Same year. Nearly £1 million difference based on proper normalisation.

The Three-Year Average

Don’t use just one year. Calculate normalised EBITDA for last three years, then average.

Why? One good or bad year doesn’t reflect maintainable earnings.

Example:

• 1st year normalised EBITDA: £782,000
• 2nd year normalised EBITDA: £859,000
• 3rd year normalised EBITDA: £891,000

Three-year average: £844,000

This is your baseline for valuation.

What Buyers Will Challenge

During due diligence, buyers scrutinise every adjustment.

They’ll challenge:

“Is that really market rate for CEO?” Be prepared to show salary surveys, recruitment data, comparable roles.

“That equipment maintenance is essential, not deferred.” Know the difference between normal ongoing maintenance (keep in) and catch-up from deferral (adjust out).

“Those client entertainment costs are necessary.” Some entertaining is necessary. Some is excessive. Know which is which.

“Your spouse is overpaid for that role.” Have market data ready. Independent job evaluation helpful.

According to Business Law Donut’s valuation guide: “For example, money spent on software development might have been capitalised by the owner. You might consider that it should have been treated as a cost.”

Source: Business Law Donut, Essential Guide to Valuing a Business, 2025

Buyers will make adjustments you didn’t. Be ready to justify your normalisation.

The Documentation You Need

To calculate normalised EBITDA properly, gather:

1. Three years of full accounts Not just annual returns—complete management accounts with P&L detail.

2. Director remuneration details Salary, dividends, benefits, pension contributions for all directors.

3. Related party transaction list All payments to family members, connected companies, your property.

4. One-off cost documentation Evidence that disputed legal matters are resolved, restructuring is complete, relocation is done.

5. Market rate benchmarking Salary surveys for your roles, industry benchmarks for key positions.

6. Asset condition assessment Professional view on deferred maintenance, required capex, facility state.

Strategic Growth for Enterprise’s research found only 3% of UK business owners have all documents ready for sale.

Don’t be in the 97% scrambling during due diligence.

Your Week 1 Action Plan

This week, calculate your normalised EBITDA for the last three years.

Monday (3 hours): Gather three years of accounts. Extract profit before tax for each year.

Tuesday (2 hours): Calculate basic EBITDA for each year (add back interest, tax, depreciation, amortisation).

Wednesday (3 hours): Identify all adjustments for Year 1. Owner comp, personal expenses, one-offs, related parties.

Thursday (3 hours): Apply same adjustment process to Years 2 and 3. Be consistent.

Friday (1 hour): Calculate three-year average normalised EBITDA. This is your baseline number.

Weekend: Review: Are your adjustments defensible? Would a buyer accept them? What documentation do you need to support them?

What You’ll Have by Next Week

By next Wednesday, you’ll have your three-year average normalised EBITDA.

This is the “F” in F.A.C.E.—your Financial performance baseline.

Next week, we’ll cover the “A”—Assessment of risk factors that reduce the multiple applied to this EBITDA.

But this week’s work is foundational. Get this number right, or everything that follows is wrong.

Most business owners guess at normalised EBITDA. You’re going to calculate it properly.

Block the time. Do the work. Know your number.

Is your business saleable and exit ready for you to leave it (no matter when it happens)? Click to to get Christine’s free Exit Ready Checklist the expert in making sure your business is saleable for more money and on better terms.   Christine helps you get out of the day-to-day, guides you through the handover of controls and gets you and your businesses exit ready so you can enjoy a happier, richer future.  She saves you THOUSANDS so you can increase the value of your businesses by MILLIONS.