How to Value a Business in Australia: Common Methods Explained
Valuing a business is part art, part science
There is no single formula for valuing a business. A business’s value is the meeting point between what the seller wants, what the buyer is willing to pay, and what the market considers reasonable — and all three are never exactly the same.
Understanding valuation methods helps you ask the right questions when buying — or prepare properly when you want to sell.
The earnings-based method
This is the most common method for an operating business that generates stable profits.
EBIT and EBITDA: Earnings Before Interest and Tax (EBIT) and Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) are common measures. Buyers and sellers usually agree on a normalised earnings figure — that is, profit adjusted to remove one-off, unusual items and “owner adjustments”.
Multiple: A business’s value is often calculated by multiplying earnings by a multiple appropriate to the industry. The multiple varies significantly depending on the industry, the business’s level of risk, how dependent it is on the owner, and its growth prospects — there is no standard figure that applies to everything.
Why the multiple matters: two businesses with the same profit can be valued very differently if one depends on its owner (high risk) and the other has systems and independent staff (lower risk).
The asset-based method
This is a better fit for a business with little or no profit, or one whose value lies mainly in physical assets (property, equipment, inventory).
You calculate net asset value: the total value of assets minus debts and obligations. The challenge is determining the “market” value of each asset — not the book value or original purchase price.
An asset-based valuation usually produces a minimum, or floor, value — a seller does not want to sell below the net value of the assets. But for a well-performing operating business, an earnings-based valuation is usually higher and more appropriate.
The market comparison method
This compares the business with similar businesses sold recently in the same industry and of a similar size. This data is not always easy to find — many private business sales are not made public.
Business brokers often hold data on comparable sales in their industry — one reason brokers add value in the buying and selling process.
Factors that raise or lower value
Raise value:
- Stable, steadily growing revenue and profit
- A business that can run without the owner (systems, staff)
- Long-term contracts with customers
- A premises lease with several years left and a renewal option
- A strong brand and reputation
- Little competition, or a clear competitive position
Lower value:
- A business that depends entirely on the owner (cannot be transferred)
- Revenue concentrated in one or two large customers
- A premises lease close to expiry with no certainty of renewal
- High competition and no distinguishing advantage
- Financial records that are unclear or inconsistent
Who does the valuation?
Accountant: Can do an earnings-based valuation and prepare normalised financials. Suitable for many small business transactions.
Professional business valuer: A specialist with business valuation credentials — needed for complex transactions, disputes, or matters involving the courts and the ATO.
Business broker: Often provides an opinion of value as part of a listing service — with practical market knowledge, but also an interest in making a deal happen.
A buyer should obtain their own independent valuation — not just rely on the seller’s or broker’s figures.