How can businesses earn premium valuations in 2026?

Valuations

Business valuations today are being driven by a sharper and more rigorous set of fundamentals than in previous years. While the core components remain consistent, like sound financial foundations, incentivised management, commercial fundamentals and real growth capabilities, they are under more scrutiny than ever, with buyers seeking evidence that they truly drive the business’ value.

Furthermore, rising interest costs, tougher wage pressures, and AI-fuelled competitive shifts mean the gap between premium and lower-value businesses is widening at a fast pace.

This article examines the four key characteristics observed in businesses that are expected to attain valuation premiums in 2026. According to our experts, these attributes often contribute to valuations that surpass the sector mean or median. In certain instances, such premiums may result in multiples that are twice the average. The features are as follows:

Sound fundamentals against all three financial statements.
Strong management who are well incentivised to grow value.
Commercial fundamentals today (not future expectations).
Real growth capabilities.

What are the five elements of sound financial fundamentals?

Sound financial fundamentals involve the analysis of previous and current financial statements to demonstrate the following:

1. That revenue growth rate has significantly outpaced both inflation and peer growth rates.

Most mature businesses with a £5–100 million turnover should achieve at least 10% organic revenue growth, driven by either pricing or volume.

2. Superior gross margins to industry peers and prospective acquirers.

This illustrates the ability to balance volume, price and purchasing decisions, which collectively drive competitive advantage. Leveraging price elasticity within the product range and implementing bundling or novel service offerings can also contribute to this.

3. EBITDA that is above the relative risk of the capital needed to run the business.

If a business needs a large or risky balance sheet to run smoothly, due to slow incoming payments, dependence on debt, or significant kit needs, then they should ensure margins are structurally higher to compensate for that risk. Valuers and negotiators now view an attractive overhead base as something valuable, rather than simply lean. They consider how it can lead to higher margins, superior revenue growth, improved service, or a lighter balance sheet. EBITDA is the outcome of these factors, whether by chance or careful decision-making. While comparing to peers or larger businesses can help to some extent, choosing the right proportion of EBITDA to risk is a judgement call which depends on the experience and quality of Board members and advisers.

4. Debt is limited for use in growth projects like organic expansion, M&A, or buying valuable assets.

In a premium valued business, debt is not needed for normal trading, and the interest burden does not restrict the ability to invest in new growth projects. Recently, many businesses which were once highly profitable have been experiencing eroded profits, and the debt burden poses a serious challenge even if operations are running smoothly. This is likely to lower the value, as reduced flexibility makes buyers question whether a business is truly premium, regardless of its debt-free, cash-free basis. Capital restructuring and reinvestment are the best ways to address this.

5. Attractive levels of cash generation.

A business’ ability to generate high levels of cash from operating activities is deemed attractive and can contribute to a premium valuation.

Lower value businesses tend to be those that are struggling to pass on price increases, whether it’s due to the sector or business model, and this leads to depression in value. The only solution to this is having a growth rate that’s significantly more than 10%.

Strong management who are well incentivised to grow value

A strong management team with expertise in sales, operations, and finance is essential for value creation. This team should consist of those who remain after a sale, not those who leave. Ideally, they should also have a strong equity incentive when value grows at a premium.

Our experts have encountered several owner-managed businesses who say their potential Management Buyout (MBO) team is not ready to take the reins, which raise questions about who’s responsible for changing this issue, and when investment in development should start. This depends on the value the owner is aiming for, as well as how much risk they expect in the deal structure. Businesses backed by Private Equity (PE) rarely experience the same issue, as they more readily change management they don’t believe in. In general, most valuable businesses follow the motto of “change the people or change the people” and now, perhaps more than ever, large buyers recognise the value of buying talent.

We also commonly see incentive structures based on growth shares and EMI share options, which serve as appropriate and customisable instruments in aligning incentives with value growth.

How does AI influence management operations and value growth?

We are now seeing the first examples AI use delivering EBITDA margin advantages across many sectors. Its adoption is typically led by a few individuals within the businesses, who understand the importance of leveraging the technology, and therefore get ahead of the curve, matching the various applications of tech tools with the business’ needs. This requires strong management, and businesses should keep in mind that the value created is not in the technology itself, but in the margin increase. A common misconception is that if a business deploys AI, e.g. through an internally built agent, that the company value should increase to account for this internally generated capability. We haven’t yet seen buyers accept this as an outright additional item to value, but to the extent the technology delivers margin growth we are seeing those additional profits contribute to premium valuations.

Commercial fundamentals today

Today, more than in past years, a selling company’s pitch of ‘jam tomorrow’ is more likely to fall flat. When shareholders want to sell today, but revenue and margin growth is only materially projected in future years, it is extremely difficult to maximise value; buyers want evidence as opposed to predictions. In contrast, the characteristics of businesses that possess strong commercial fundamentals today include:

Operating in an attractive market

The trends surrounding current and potential clients are positive and align with global direction. One effective approach is to view things from a buyer’s perspective. You can do this by asking buyers or their advisors directly, or by observing quarterly earnings reports of public companies to identify where they perceive opportunities.

A strong position in the value chain

The business model is protected from being bypassed by new entrants, overwhelmed by competition, or losing margin to upstream or downstream expansion. In many industries, businesses have attempted to reposition themselves but ended up losing value in the process. While this is natural for product-based businesses, it equally applies to service-based businesses. Whether and how companies adopt AI is also changing value positions.

Attractive and satisfied customer group

Customers are happy, profitable, expanding and financially stable. The business may even be turning away lucrative opportunities because it cannot expand supply quickly enough. A positive customer group a double-edged sword: it is more difficult to acquire in the short-term, because attractive customers are usually hard to identify then sell to, but they tend to deliver stronger P&L results over time. Buyers love to discover value here, provided it doesn’t lead to an overly concentrated customer base, because replicating this appeal isn’t easy. Although time, effort, or money can help, it’s truly challenging to match what these companies offer.

Business-specific risks (also known as non-systematic risks) do not materially impact performance

For most UK businesses, systematic risks are the things everyone in the sector shares in roughly equal proportion. Non-systematic risks are associated to the business specifically, like currency exposure, quality of talent, software and kit requirements etc. Buyers place significant importance on this, their key consideration being the proportion of features that may present risk. AI can heighten risk, especially when competitors harness it to lower prices and increase profit margins. In addition, National Insurance and minimum wages costs have risen significantly, meaning businesses that hire many low-paid workers may be viewed as unattractive to buyers. Many deals have fallen through because buyers are reluctant to take on companies with large workforces and the subsequent risk of unpredictable tax bills.

A highly satisfied customer base

Ensuring that the acquired customer base is satisfied has become an important priority for buyers. As a result, business owners should anticipate that potential acquirers may assess customer satisfaction during the due diligence process.

Real growth capabilities

A business with a premium valuation should be demonstrating in real time, the ability to continuously sell to their customer-base at an interesting growth rate, with strong operations and supply chain management to match. This stands true even if supply expansion plans are met with obstacles rising from current global challenges. Revenue growth at an attractive rate reflects not only past performance but also current and future prospects, indicating product market fit. There is a qualitative dimension to this, which is that such businesses can generally be characterised by vibrant atmospheres, strong cultures and the constant surpassing of targets. These organisations are deeply in engaged in generating substantial profits and any offer to acquire the business must be exceptional to merit serious consideration.

It is also worth noting that in some sectors, such as technology, the Rule of 40 also tends to play out as true. This refers to the business’ Revenue Growth Rate percentage and its EBITDA percentage, which, when added together, equal 40. That can mean Revenue Growth Rate is at 40%, but the business is making no profit, that it’s at 0%, but the business is making 40% profit, or a more evenly balanced ratio.

In some sectors, these benchmarks play out as true even in the mature stage with £5-100 million revenue, but other sectors require growth rate capabilities to be higher. More buyers will expect to see some sort of trade-off between Revenue Growth Rate and EBITDA, with the real risk stemming from having neither.

What are the main viewpoints towards growth-driving values?

Route 1 – Work smart:

We should take a more strategic approach to increasing value and hit some of these markers through deliberate change, and that will increase both our profits and valuations multiple.

Route 2 – Work hard:

“We’ll just sell harder and work harder and create more profit because that will increase value”

– and it will, or in this market it may just get you back to where valuation was a few years ago.

Route 3 – Leave it up to fate:

“Valuation multiples go up and down, it doesn’t matter because I’ll take what the market gives me when I need to sell, or I’ll wind the company up.”

There’s no right or wrong approach, as a business’ value-driving strategy should ultimately align with its goals. However, more and more business owners are experiencing fatigue due to the increasingly challenging economic conditions. These businesses are now much less focused on the value of their company as they once were, and more focused on Inheritance Tax (IHT) family cashflow planning and the liquidation values of their business. Having said that, there are still many UK businesses willing to go down routes one and two, but those in route one are likely not ready to sell as they are reinvesting profits into growth, and those in route two are rarely ready to sell as they are still working hard on the business. Both, however, may be waiting for a different government and tax regime before they realise value.

Our experts at Price Bailey have seen hundreds of clients pick many different directions in achieving valuations they can accept. In recent times, the four features explored in this article have been the determining factors which business owners can control that lead to premium valuations being paid.

If you’d like to find out more, sign up to our valuations webinar, which provides the latest data and trends every quarter. Or for tailored advice or enquiries, contact our SCF partner, Chand Chudasama, using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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