The Hidden Impact of Rising Labour Costs on SME Valuations
The owner of a small business sits at his desk late in the evening. The numbers no longer add up as they once did. Wages have risen, National Insurance contributions have climbed, and the once dependable margin that kept his company steady has thinned to a dangerous line. He has worked hard for years, but the landscape has shifted beneath his feet.
This is not an isolated story. Since the spring of 2025, when the Labour Government raised both the National Living Wage and employer National Insurance, thousands of owners have faced the same calculation. Across the country, firms have been forced to cut jobs, with hospitality alone shedding some ninety thousand. Recruitment has slowed, costs have outpaced revenues, and the prospect of passing the burden on to customers has grown steadily harder.
For the entrepreneur who is thinking of selling, the consequences are plain. Valuation depends on earnings, and when labour costs climb, earnings contract. Buyers see profits shrinking, more capital tied up in the day-to-day running of the business, and a greater chance of failure. Their response is predictable: offers are reduced, terms become stricter, and cash is withheld in favour of arrangements that stretch into the future.
The severity of this change is uneven. Those who trade in hospitality or food service are struck hardest, for labour is their chief expense and competition keeps prices pinned. Insolvency is already rising in these quarters. Yet in technology and digital ventures, the story is different. Automation and scale protect margins, and buyers remain eager, for these businesses still command authority and resilience.
If you are an owner, you must read the signs clearly. This is not a time to dwell on valuations of the past. To delay is to watch the market move against you. Better by far to act now, while you can still protect value. Invest in efficiency, use technology to shield your margins, and build the flexibility that will steady your business against further shocks. Above all, prepare your company for scrutiny, for buyers will examine every figure with care.
There is no disguising the truth. Rising labour costs have altered the ground on which sales are made. Those who act with foresight will still secure good exits, even in a harsher climate. Those who wait may find that the value they hoped for has already slipped away.
A business is more than its present profit. It is a story of work, of persistence, and of future promise. To sell well in this new environment, you must not only show what you have built but prove that it can endure when the burdens of cost grow heavier. That, in the end, is what every discerning buyer seeks.
