Almost every owner who calls us starts the conversation the same way: 'I just want a rough idea of what my business is worth.' That instinct is right. The most expensive mistake in business valuation is paying for a formal, signed report when an indicative range would have answered the actual question in front of you, and the second-most-expensive mistake is using a casual indicative range when a third party (HMRC, a buyer's lawyer, a judge, a trustee) needs a signed report they can rely on.
This article sets out the practical difference between an indicative valuation and a formal valuation, when each is appropriate, what each one costs, how long each takes, and how to tell which one you actually need. It is written for UK owner-managers of trading SMEs. The audience for whom over-engineering and under-engineering are both common, expensive errors.
What an indicative valuation actually is
An indicative valuation is a reasoned range, usually delivered after a discovery call and a quick look at two or three years of statutory accounts plus a current management view. It is the kind of work an experienced valuer can do in a few hours: identify maintainable EBITDA, apply a sensible multiple based on sector and size, sanity-check against any obvious comparables, and articulate a high-low range with the reasoning behind it.
Critically, an indicative valuation is not a guess. It is the valuer's professional view of where the business would land in a normal market under normal conditions, expressed as a range to reflect the genuine uncertainty in any single-point answer. A good indicative range is usually 15–25% wide. Narrow enough to drive decisions, wide enough to acknowledge that the precise number depends on the buyer set and the deal process.
Indicative valuations are not written up in detail and they are not signed off in a form that survives third-party scrutiny. They are a planning tool. Owners use them to test whether retirement is realistic, to benchmark against an unsolicited approach, to think through succession options, to scope a pre-sale grooming programme, or simply to put a sensible number into family conversations about the future.
What a formal valuation actually is
A formal valuation is a written, signed report prepared to a recognised methodology, with explicit assumptions, source data, comparator analysis and a defended conclusion. It is the document an external party. HMRC, a court, a trustee, a buyer's accountant. Will read, challenge and rely on. The valuer's name and professional standing are on it; the valuer is accountable for the number.
Formal reports run from 15 to 60 pages depending on the purpose. They typically include: a description of the company and its trading record; the basis of the maintainable earnings figure with all normalisations explained; the choice of methodology (earnings multiple, DCF, asset, or a blend) and why; the source of comparables and how they have been adjusted; the cap table and any rights affecting per-share value; restrictions and how they have been discounted; sensitivities; and a clear concluding number or range with the date of valuation and the basis of value.
The discipline that makes a report 'formal' is not length. It is the chain of evidence. Every number can be traced to a source. Every assumption is stated. Every choice of method is justified. The third party reading the report should be able to reach the same answer (or a clearly bounded different answer) from the same evidence. That is what makes a formal report defensible.
When an indicative valuation is enough
An indicative range is enough whenever the decision in front of you is internal and reversible. Are you thinking about exit in three to five years and want a sense of whether the lifestyle outcome works? Indicative. Has an unsolicited approach landed and you want to know whether the offer is in the right ballpark before engaging? Indicative. Are you scoping the value of a pre-sale grooming programme? Indicative. Are you having a succession conversation with family and want a credible figure to anchor it? Indicative.
Indicative work also fits the early stages of any process. Before commissioning a formal EOT trustee report, before instructing a corporate finance house on a trade-sale process, before paying for vendor due diligence, an indicative range tells you whether the route is worth pursuing at all. Owners who skip this step routinely commission expensive formal work for routes that, with hindsight, were never going to deliver the outcome they wanted.
When you need a formal report
A formal report is needed whenever a third party will make a decision based on the number, particularly when that decision has tax, legal or financial consequences. The most common UK situations are: HMRC submissions for EMI option pricing (with VAL231), ERS reporting, probate, CGT on private-company share transfers, and gift hold-over relief; Employee Ownership Trust trustee evidence supporting the trustees' decision that the purchase price does not exceed market value; court proceedings, including shareholder disputes, derivative actions and unfair-prejudice petitions; divorce and matrimonial settlements; formal Management Buy-Out pricing where institutional debt or external equity is involved; and any situation where directors need protection from a future allegation that the price set was wrong.
In all of these the number itself is only part of the deliverable. The other part is the written reasoning that allows the third party to test the conclusion. A number without that reasoning is not actionable; it is just an opinion. Formal reports are how opinions become evidence.
What about for a trade sale?
Trade sales sit interestingly between the two. The seller does not technically need a formal valuation to go to market. The price is whatever the buyer pays, but a well-structured information memorandum supported by a defensible internal valuation is one of the most important pieces of preparation. The number sets the seller's reservation price, anchors the conversation with the corporate finance adviser, and provides a sanity check for the eventual offers.
Most sellers use an indicative range at the start of the process to scope whether to proceed, then commission a more rigorous internal valuation as part of building the information memorandum, and rely on the buyer's own diligence to test the number. A standalone formal report for a trade sale is unusual outside specific situations (an institutional shareholder requiring evidence, a regulated industry, a complex carve-out).
Cost and turnaround
Indicative valuations are typically free or carry a nominal fixed fee, and delivery is days rather than weeks once the basic information is provided. Some valuers (including us) offer an indicative as the first step of a longer engagement; others price it as a paid scoping exercise. Either way the investment is small in absolute terms and tiny relative to the decisions it supports.
Formal valuations are fixed-fee, typically two to four weeks end to end, and the fee scales with complexity. A straightforward EMI valuation for a single share class with a clean cap table sits at one end of the scale; a multi-class waterfall for a venture-backed company with preference rights, anti-dilution provisions and convertible notes sits at the other. A formal report for litigation or trustee evidence carries a premium because the standard of documentation is higher and the valuer accepts a higher level of professional exposure.
The right question is not 'which is cheaper' but 'which fits the decision'. An indicative valuation that should have been a formal report can cost you hundreds of thousands in challenged tax positions. A formal report that should have been an indicative range is wasted money you cannot get back. Match the work to the decision and the economics look after themselves.
Getting the most from each
To get the most from an indicative valuation, share three years of statutory accounts, the latest management accounts, a one-page commentary on trading and one-off items, and a brief description of the situation that has prompted the call. That information is enough to give you a reasoned range and to flag the issues that would need to be settled in any formal work.
To get the most from a formal report, add the cap table with rights for each share class, the articles of association, any shareholders' agreement, details of option grants and warrants, current-year forecast and budget, and the purpose of the valuation. The purpose matters because it determines the basis of value, the comparables that are most relevant, and the standard of documentation required. A report written for HMRC reads differently from a report written for a court, even if the number is the same.
In both cases, the valuer's value is in the questions they ask, not just the number they give back. An indicative call that produces a range and three specific actions to improve the number is worth far more than one that produces a range alone.
Common mistakes
The most common mistake is reaching for the wrong tool. Owners who instinctively want certainty commission formal reports for purely internal decisions and end up over-paying for documentation they never use. Owners who instinctively want speed rely on an indicative range when HMRC, a court or a buyer needs a signed report, and end up paying for both the formal report and the consequences of the delay.
A second mistake is treating a valuation as a one-off event. Indicative valuations age quickly; a range from two years ago is interesting context but not a current view. Formal reports for HMRC have explicit validity windows. Both should be refreshed when the decision they support is current.
A third is mistaking the basis of value. The 'market value' a buyer will pay in a trade sale is structurally different from the 'fair value' a minority shareholder might receive in an unfair-prejudice judgment, or the 'open market value' HMRC uses for EMI. Asking for a 'valuation' without specifying the basis can produce a number that is technically correct but completely wrong for your purpose.
How to decide which you need
Start with the decision. Who else will rely on the number, and what authority do they answer to? If the answer is 'nobody outside the boardroom for now', an indicative range is almost certainly enough. If the answer is HMRC, a court, a trustee, a regulator, or a buyer's accountant who will pressure-test every line, you will need a formal report eventually, and starting with the indicative is still useful, but as the first step rather than the deliverable.
When in doubt, ask the valuer. A short call should be enough to decide. The valuer's incentive in a long-term advisory relationship is to recommend the right product, not the most expensive one. If a valuer pushes for a formal report when you describe an internal planning question, that is a signal worth noticing.
A short checklist
Use the indicative when you are scoping, planning, benchmarking or testing an unsolicited offer; use the formal when HMRC, a court, a trustee, a regulator or a buyer's accountant will rely on the number. Refresh either when the underlying business has moved. Ask the valuer first if you are unsure. The right product is almost always the cheaper one for the work in front of you.
Questions & Answers
Quick reference answers to the questions UK SME owners most often ask on this topic.
Is an indicative valuation legally binding?
No. Indicative valuations are a planning tool. A reasoned professional view delivered without the documentation, sign-off and review process of a formal report. They are not designed to be relied on by third parties and they typically come with explicit caveats to that effect.
Can I use an indicative valuation for HMRC?
No. HMRC submissions. EMI VAL231, ERS reporting, probate, CGT computations. Require a formal valuation with the underlying methodology and evidence properly documented. Submitting an indicative range will at best be queried and at worst be challenged later.
How accurate is an indicative valuation?
Done well, an indicative range typically captures the actual outcome 70–80% of the time within its stated bounds. The remaining variance comes from buyer-specific synergies, deal structure, and process effects (auction tension, competing offers) that cannot be modelled in advance. The range is honest about that uncertainty rather than hiding it behind a single number.
Will the formal number be the same as the indicative range?
Usually yes. The formal number sits within the indicative range, often near its midpoint. Where it differs, it is normally because the formal process surfaces information (one-off items, working capital adjustments, off-balance-sheet liabilities) that the indicative could not see. The formal number is the one that should be relied on for any decision a third party will scrutinise.
What does an indicative valuation cost?
Most reputable firms offer an indicative as a free or low-cost first step. Some charge a nominal fixed fee in the low hundreds. The cost should never be the barrier to having the conversation, if it is, you are talking to the wrong adviser.
What does a formal valuation cost?
Fees scale with complexity. A simple EMI report for an owner-managed SME with a clean cap table is typically in the low thousands. Multi-class waterfalls, litigation evidence, or trustee reports for EOT transactions run higher. Get a fixed fee before commissioning and confirm what is and is not included.
How long does a formal valuation take?
Two to four weeks end to end for most owner-managed SMEs, assuming the company provides the underlying accounts, cap table and articles promptly. Complex cases (multi-jurisdictional, regulated, contested) take longer. The bottleneck is usually information from the company side, not the valuer.
Do I need a formal valuation if I am not selling?
Not for most internal decisions. You may need one for HMRC events (EMI grants, ERS, probate), for trustee evidence (EOT, family trust), or for shareholder transactions inside the company (buy-backs, share-for-share exchanges). Strategic planning, succession thinking and benchmarking against a market approach are normally well served by an indicative.
Can I commission an indicative and then upgrade to formal?
Yes, that is the most common sequence. The indicative work informs whether to proceed at all, and most of the analysis carries through into the formal report. Expect a credit or a discounted fixed fee for the formal step if you stay with the same valuer.
How long is an indicative valuation valid for?
Treat it as current for six to nine months in a stable trading environment, less if the business is changing quickly or if market conditions are moving. After that, refresh rather than rely. An old indicative range is context, not a current view.
Who should sign a formal report?
An appropriately qualified valuer, typically a chartered accountant or a member of a recognised valuation body, with relevant experience in the sector and purpose. For HMRC and court purposes the independence of the valuer matters as much as their qualification.
What if the buyer's valuation disagrees with mine?
Disagreement is normal. Buyers and sellers are looking at the same business through different lenses and with different return requirements. A defensible formal valuation gives you the evidence to negotiate; an indicative range sets your reservation price. The real conversation is rarely about the number itself. It is about the assumptions behind it, and a well-documented valuation lets you have that conversation on equal terms.
Written by
Tony Vaughan
Senior SME valuation adviser, 2,500+ business value appraisals.
