How to value an SME in Sri Lanka: three valuation methods

Last verified against the primary sources on 15 October 2026.

Most owners of Sri Lankan SMEs have never valued their company. This guide explains the three standard methods (earnings multiple, asset-based and discounted cash flow), what each needs as input, and which suits which kind of business. You can try your own figures in our business valuation calculator. Any calculator result is a planning reference, not a formal valuation opinion.

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Why valuation matters for Sri Lankan SME owners

For day-to-day operations, not knowing your company's value is rarely a problem. In these situations it is:

Seeking investment. An investor will arrive with their own valuation. Without a reference point of your own, you are negotiating blind. Understanding the three methods, and which one applies to your business, puts you in a stronger position.

Selling the business. Owners who have not thought about value before a sale tend either to undervalue the business or to set an asking price that puts buyers off. Even an indicative valuation anchors the process.

Exit and succession planning. Family and owner-managed companies often face succession with no clear way to price a transfer between family members, or between outgoing and incoming shareholders.

Shareholder exits and share buybacks. When a shareholder leaves, a fair price for their interest has to be agreed. Disagreements over value are a common source of shareholder disputes, so agree the method early, ideally in the shareholders' agreement.

Bank borrowing. Lenders sometimes ask for a valuation of the business as a going concern, separate from the valuation of the security, particularly for larger facilities.

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The three valuation methods

Method 1: Earnings multiple (EBITDA multiple)

The earnings multiple method applies a multiple to the business's earnings, most often EBITDA (earnings before interest, tax, depreciation and amortisation).

Business Value = EBITDA x Sector Multiple

Multiples vary by industry, growth, size and risk. For Sri Lankan SMEs they tend to be lower than for comparable businesses in larger markets, because there are fewer buyers, shares are less liquid and international acquirers price in country risk. There is no published official table of Sri Lankan SME multiples, so base any multiple on comparable transactions or listed companies in your sector, adjusted for size, and use a range rather than a single figure.

Inputs:

• EBITDA for the last 12 months (or an average over a few years for a volatile business)
• Adjustments for owner salaries above or below market, related-party transactions and one-off items
• A low, middle and high multiple for your sector, so you can see the spread

Method 2: Asset-based valuation

The asset-based method values a business by its net assets: the fair value of its assets less its liabilities. It suits holding companies, property-heavy businesses, businesses with large physical assets, and businesses being sold for their assets rather than their earnings.

Business Value = Fair Value of Assets minus Total Liabilities

The key words are "fair value". Book value often differs from fair value for:

• Land and property. Book values often reflect historical cost, which may be far from current market value.
• Equipment and vehicles. Book value after depreciation may be lower or higher than the second-hand market price.
• Debtors. Reduce for amounts unlikely to be collected.
• Goodwill and intangibles. Self-generated goodwill is not recognised on the balance sheet but may represent real value in a going concern.

Inputs:

• Total assets at book value
• Total liabilities
• Revaluation adjustments for property, if you have a recent valuation
• Debtors you do not expect to collect

Method 3: Discounted cash flow (DCF)

The DCF method values a business at the present value of its future free cash flows, discounted at a rate that reflects the risk of achieving them.

Business Value = Sum of (Free Cash Flow in Year N / (1 + Discount Rate)^N) + Terminal Value

DCF is the most rigorous method in theory and is standard for large transactions. For SMEs it is very sensitive to assumptions: small changes in the growth rate or discount rate produce large swings in value.

Inputs:

• Current free cash flow (operating cash flow minus capital expenditure)
• Growth in revenue or cash flow over the projection period (often five years)
• A terminal growth rate: a modest long-run rate for the years after the projection period
• A discount rate

A common starting point for the discount rate is the yield on Sri Lankan government securities as the risk-free rate. Treasury bond yields were roughly 10.25% to 12.29% in the week to 9 October 2026 [1]. A small private company then needs a premium on top for its additional risk, so the discount rate ends up well above the government yield. Show the result at several discount rates.

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Which method to use for your business

The three methods will rarely give the same number. The right weighting depends on the business:

Treat a blend of the methods as a starting point, not an answer.

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Before valuing a group of activities together, consider whether separate companies are appropriate for each business.

Limitations of a calculator valuation

A calculator valuation is useful for planning. Know its limits before relying on it.

It cannot account for qualitative factors. Customer concentration, management depth, brand, licences and competitive position all affect what a buyer will pay. A business with LKR 20,000,000 of EBITDA that earns 80% of it from one customer is worth less than one with the same EBITDA spread across fifty customers.

The inputs are only as good as your accounts. If the financial statements do not reflect the economics of the business, because owner drawings are booked as expenses, related-party transactions are not at market value or revenue is deferred, the output will be distorted.

Market conditions change. Multiples fall in difficult conditions and rise when capital is plentiful and buyers are active.

It is not a formal valuation. For a transaction, an investor negotiation, a dispute or a submission to a regulator, you will usually need a formal valuation from a qualified professional.

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When to engage a professional valuer

Engage a professional valuer when:

• You are in active sale or merger discussions, or have received an unsolicited offer
• You are preparing to raise capital and need a defensible pre-money valuation
• You are in a shareholder dispute over the value of shares
• You need a valuation for estate or succession planning
• A bank or investor has asked for a formal valuation opinion
• The methods give very different answers, which suggests the business does not fit a standard profile

Talk to us. If your accounts need bringing up to date before a valuation or a capital raise, see our accounting services and get in touch through our contact page.

This guide is general information on the law as at 15 October 2026 and is not advice on your specific situation.

References

1. Central Bank of Sri Lanka. Weekly Economic Indicators, 9 October 2026, government securities yields. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/wei/WEI_20261009_e.pdf . Primary. Accessed 15 October 2026.