Andrew Markou is the CEO and Co-Founder of BusinessesForSale.com. He has extensive experience in the business for sale market and the factors that influence valuation. He is also the author of A Pocket Guide to Buying a Business, which explains the acquisition process and explores how buyers can assess what a business is worth.
What is a business really worth?
Ask a seller and you might get one figure. Put the same question to a prospective buyer and the answer could be quite different. Neither number necessarily represents the price at which the business will eventually change hands.
After more than 30 years of helping owners bring businesses to market in Australia and around the world, we know that business valuation is both an art and a science. Financial performance gives you a foundation, but the numbers are only part of the picture. Ultimately, a business is worth what a credible buyer is prepared to pay – and arriving at that figure usually involves negotiation as well as accounting.
In this guide, we’ll explain how to value a business in Australia using some of the most common valuation methods and formulas. We’ll cover the information you need, the differences between the major valuation approaches, common mistakes and when it may make sense to seek professional advice.
Tip: to get started quickly, try BusinessesForSale.com’s free ValueRight business valuation calculator.
How Do You Value a Business in Australia?
There is more than one way to determine the value of a business. Depending on the company, you might look at its earnings, assets, revenue, expected future cash flow or evidence from comparable business sales.
For many profitable small and medium-sized businesses, a useful starting point is:
Indicative business value = Maintainable earnings × Appropriate valuation multiple
Maintainable earnings are important because a buyer isn’t simply purchasing last year’s performance. They want to understand how much profit the business can reasonably be expected to continue generating after ownership changes.
The appropriate multiple is less straightforward. Business performance and risk, industry conditions, comparable transactions and the wider market can all influence it. The eventual price will also be affected by negotiations between buyer and seller. We break multiples down in further detail later in this guide.
The formula won’t suit every business equally. An asset-heavy agricultural operation and a fast-growing technology company, for example, have very different characteristics and may require different approaches to valuation.
What Do You Need to Value a Business?
Any valuation is only as good as the information behind it. Before getting started, buyers and sellers should build a clear picture of the company’s financial performance, assets, liabilities and wider commercial position.
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Information |
Why it matters |
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Financial statements covering at least three years |
Show revenue, expenses, profitability and longer-term performance |
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Recent interim or management accounts |
Provide a more up-to-date view than the latest annual statements |
|
Relevant company records and filings |
Can help confirm important information about the company and its ownership |
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Balance sheets |
Show assets, liabilities, cash and debt |
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Cash flow statements |
Reveal how effectively accounting profits translate into cash |
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Owner remuneration and benefits |
Help establish the financial benefit received by a working owner |
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Discretionary and non-recurring expenses |
Identify potential adjustments to reported earnings |
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Asset register |
Lists property, machinery, vehicles and other significant assets |
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Outstanding debts and liabilities |
Helps establish what the business owes |
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Revenue by customer |
Highlights potentially risky dependence on major customers |
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Contracts and recurring revenue |
Help assess how predictable and transferable future income may be |
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Forecasts and sales pipeline |
Provide evidence of future opportunities, although projections require scrutiny |
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Leases, licences and intellectual property |
Identify important rights, commitments and intangible assets |
Depending on the company, information lodged with the Australian Securities and Investments Commission (ASIC) may also be relevant when checking company details and corporate records.
Prospective buyers are likely to scrutinise this information during due diligence. Missing records, unexplained costs or ambitious forecasts can come back to bite you, so it pays to do your homework.
What Are the Main Business Valuation Methods?
Most valuation approaches can be placed into three broad categories.
Earnings-based methods concentrate on the profit or financial benefit produced by the business. Asset-based approaches examine what the company owns and owes. Market- and future-based methods consider evidence such as comparable transactions, revenue or expected future cash flow.
There is no perfect method for every company. The important thing is understanding what each approach measures and whether it makes sense for the type of business being valued.
Seller’s Discretionary Earnings
Seller’s Discretionary Earnings, or SDE, is often used when valuing smaller owner-operated businesses.
Rather than relying only on reported profit, SDE aims to estimate the total financial benefit available to a single full-time owner-operator. Certain expenses and benefits associated with the existing owner are therefore adjusted.
These can include owner remuneration and benefits, interest, depreciation and amortisation, legitimate discretionary expenditure and genuine one-off expenses.
When Is SDE Most Useful?
SDE is generally best suited to smaller businesses where the owner is actively involved in day-to-day operations and receives a salary, remuneration or other benefits from the company.
Examples could include independent retailers, cafés, trades businesses, agencies and local service businesses. It can be particularly relevant when a buyer intends to step into the current owner’s role.
How Do You Calculate SDE?
A simplified formula is:
SDE = Pre-tax profit + owner’s remuneration and benefits + interest + depreciation and amortisation + eligible discretionary expenses + non-recurring expenses
Once you’ve established maintainable SDE, an appropriate valuation multiple can be applied:
Indicative business value = Maintainable SDE × SDE multiple
Imagine an Australian marketing agency generating A$100,000 in annual pre-tax profit. Its working owner receives A$50,000 in remuneration, while the accounts include another A$10,000 of legitimate personal or one-off expenses that would not continue under new ownership.
Its SDE would be:
A$100,000 + A$50,000 + A$10,000 = A$160,000
If relevant market evidence supported a multiple of three, the calculation would produce:
A$160,000 × 3 = A$480,000
That doesn’t mean the business is guaranteed to sell for A$480,000. Growth, customer concentration, competition, reliance on the owner and other risks can all influence the multiple a buyer is prepared to accept.
EBITDA Multiple Valuation
For larger and more established businesses, EBITDA may be a more useful measure of underlying profitability.
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. Removing financing costs, tax and certain non-cash accounting charges can make it easier to compare companies with different financial structures.
Which Businesses Are Better Suited to EBITDA?
EBITDA multiples tend to be more relevant to established companies with management structures that allow them to operate without relying entirely on a single working owner.
This is an important difference from SDE. SDE generally incorporates the financial benefit available to one owner-operator, whereas EBITDA does not assume that the owner’s entire remuneration can simply be added back.
How Is EBITDA Calculated?
In simplified form:
EBITDA = Net profit + interest + tax + depreciation + amortisation
The valuation formula is then:
Enterprise value = Maintainable EBITDA × Appropriate EBITDA multiple
EBITDA is useful for comparison, but it shouldn’t be confused with cash flow. Capital expenditure and movements in working capital, for example, can materially affect the cash a company actually generates.
Asset-Based Business Valuation
An asset-based valuation approaches the question from a different direction, looking at what the business owns and subtracting what it owes.
The basic calculation is:
Net asset value = Total assets − Total liabilities
Assets can include commercial property, machinery, vehicles, inventory, cash and money owed by customers. Liabilities might include loans, unpaid bills, tax obligations and other debts.
When Does an Asset-Based Valuation Make Sense?
Asset-based methods tend to work best where tangible assets represent a significant part of the company’s overall value.
Manufacturers, agricultural businesses, property-related companies and businesses with substantial machinery or inventory are obvious examples.
The approach is less useful when much of a company’s value comes from less tangible factors such as its brand, workforce, intellectual property, customer relationships or capacity to generate future profits.
Book Value and Market Value
The figure attached to an asset in the accounts doesn’t necessarily tell you what that asset is worth today.
Equipment may now be worth much less than its purchase price, while property bought years earlier may have risen considerably in value. Inventory can become obsolete and some customer debts may prove difficult to recover.
An asset-based valuation should therefore consider realistic market values rather than relying blindly on book values.
What Is Liquidation Value?
Liquidation value estimates how much could be recovered if the company’s assets had to be sold and its liabilities settled.
A forced or accelerated sale can realise considerably less than an orderly sale. This makes liquidation value more relevant to distressed or underperforming businesses than healthy companies expected to continue trading after a sale.
Discounted Cash Flow Valuation
Discounted cash flow, or DCF, focuses on what a company may generate in the future rather than concentrating mainly on historical earnings.
It estimates future cash flows and then discounts them to calculate their value today. This reflects the time value of money – A$10 received now is worth more than A$10 received several years from now because today’s money can be invested and future cash flows involve uncertainty.
A simplified DCF formula is:
DCF value = [CF₁ ÷ (1 + r)¹] + [CF₂ ÷ (1 + r)²] + … + [CFₙ ÷ (1 + r)ⁿ] + discounted terminal value
In this calculation:
- CF is forecast cash flow for each period
- r is the discount rate
- n represents the relevant period
Terminal value represents the estimated value of cash flows beyond the explicit forecast period.
Which Businesses Are Suitable for DCF?
DCF works best when a company has sufficiently predictable cash flows and credible long-term forecasts.
It can be particularly useful for larger businesses and investments where future performance provides a more meaningful indication of value than one year’s historical profit. Because the result depends heavily on assumptions about future performance and risk, it is generally less practical when reliable forecasts aren’t available.
Which Valuation Method Is Right for Your Business?
There is no single valuation method that works best in every situation. The characteristics of the business should determine where you start.
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Type of business |
Potential starting method |
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Small owner-operated business |
SDE multiple |
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Established company with independent management |
EBITDA multiple |
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Asset-heavy business |
Adjusted net asset valuation |
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Distressed or loss-making company |
Asset-based or liquidation valuation |
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Stable company with predictable future cash flows |
Discounted cash flow valuation |
Looking at the company from more than one angle can also be useful. Accountants, business brokers and professional valuers may compare several methods and sources of evidence before settling on a valuation range.
What Is a Business Valuation Multiple?
A valuation multiple is a benchmark applied to a particular financial measure, such as SDE or EBITDA, to estimate the value of a business.
If genuinely comparable businesses have recently sold for between 2.5 and 3.5 times SDE, for example, that information could help establish a potential range for another similar company.
The challenge is finding businesses that are genuinely comparable.
Companies operating in the same sector can differ considerably in size, margins, growth, location, customer concentration, recurring revenue and dependence on the owner. Any of these factors can influence the multiple.
Private transaction data can also be difficult to access, which is why advisers may use specialist transaction databases, industry research and their experience of completed sales when establishing an appropriate multiple.
Location is particularly relevant in a country as large and diverse as Australia. The market for a business in Sydney or Melbourne may differ from the market for a similar operation in regional Australia, while labour availability and costs, commercial property, local economic conditions, access to customers and the number of potential buyers can all influence demand.
A multiple is therefore evidence, not an automatic answer. It needs to be considered alongside the strengths, weaknesses and risks of the individual business.
Five Business Valuation Mistakes to Avoid
After decades of supporting business buyers and sellers, we’ve seen how relatively small valuation mistakes can produce significantly different results. Here are five worth watching for.
Using the Wrong Earnings Figure
SDE, EBITDA, net profit, revenue and cash flow aren’t interchangeable. Applying a multiple to the wrong earnings measure can quickly produce a misleading valuation.
Adding Back Too Many Expenses
Adjustments can help establish the underlying earnings of an owner-operated business, but they need to be defensible and properly recorded. Genuine personal or one-off expenses may qualify, but a recurring cost can’t simply be removed to make the valuation look better.
Focusing on a Single Year
One particularly strong year doesn’t necessarily represent what a company can continue earning. Looking across several years helps identify trends, unusual periods and whether recent growth or decline is likely to continue.
Counting the Same Assets Twice
If an earnings valuation already assumes that normal operating assets are required to generate those earnings, their economic contribution may already be reflected in the result. Adding their entire value afterwards can lead to double-counting.
Assuming the Valuation Is the Sale Price
A valuation is an informed estimate, not the final price. Due diligence, financing, negotiations, buyer demand and the structure of the transaction can all change what eventually gets paid.
Can You Value a Business Yourself?
You can produce an initial valuation yourself if you have reliable financial information and understand which valuation approach suits the company.
BusinessesForSale.com’s ValueRight business valuation calculator can provide a useful starting point.
For formal or complex valuations – particularly those connected with tax, legal proceedings, shareholder matters or succession – professional advice may be appropriate. Depending on the circumstances, this could include an accountant, business broker or appropriately qualified business valuation professional.
Finding the Right Value
There is no formula capable of capturing every reason one business may command a higher price than another.
Financial performance is fundamental, but buyers will also consider the quality and sustainability of those earnings. Recurring revenue, loyal customers, growth opportunities, well-documented systems and a management team that can operate independently of the owner can all strengthen a company’s appeal.
The strongest valuations therefore combine reliable financial information, an appropriate valuation method, relevant market evidence and a realistic assessment of the business itself.
Ultimately, business valuation isn’t about discovering one mathematically perfect number. It’s about gathering enough evidence to establish a credible range – and understanding what could push the eventual price towards either end of it.
Frequently Asked Questions About Business Valuation in Australia
How Much Does a Business Valuation Cost in Australia?
The cost depends on the size and complexity of the company, the purpose of the valuation and how much analysis is required. An initial estimate may cost little or nothing, while a detailed professional valuation will generally cost more.
Do I Need a Professional Valuer to Value a Business in Australia?
Not necessarily. You can calculate an indicative value yourself, but professional advice may be appropriate where an independent or formal valuation is needed for tax, legal, shareholder or other purposes.
Does Location Affect the Value of a Business in Australia?
Yes. Property and labour costs, customer demand, competition and the depth of the buyer market can vary significantly between Australian cities, states and regional areas, potentially influencing what a buyer is prepared to pay.
