A business is usually worth what its reliable, ongoing earnings support, adjusted for the risk that those earnings will not continue. A valuer adjusts the reported profit, applies a method that suits the business, checks the result another way, then allows for debt and surplus cash to show what the owners would receive.
What is the short answer?
Your business is worth what its reliable, ongoing earnings can support, after allowing for the risk that those earnings will not continue. The better the evidence behind those earnings, the more confidence anyone can have in the figure.
Three things matter most in valuing a profitable small business:
- Maintainable earnings: the profit the business can keep making under a new owner, not just last year's result.
- Risk: how likely those earnings are to hold up, and what could disrupt them.
- Evidence: the financial statements, records and market information that support both.
Revenue on its own does not tell you the value. Two businesses with the same sales can be worth very different amounts if one keeps much more of each dollar as profit, or carries much less risk.
The Australian Government's guide to valuing your business makes a similar point. It lists financial statements, goodwill and future profit as things that affect value. In the end, it says, value is what the market or a buyer will pay.
How does a valuer get from my numbers to a value?
A valuer works in four steps. Adjust the earnings. Choose a method. Check the result. Then work out what the owners' share is worth. Each step should be written down so you can follow it.
1. Adjust the earnings. Reported profit is the starting point, not the answer. A valuer looks for items that will not continue under a new owner. Examples: a one-off legal bill, a private expense run through the business, or owner pay well above or below what the job would cost to fill. Each adjustment needs a reason and a record behind it. The result is often called "normalised" or "maintainable" earnings.
2. Choose a method. For many established, profitable small businesses, a main method is capitalisation of earnings: maintainable earnings multiplied by a figure that reflects risk and growth. Other methods suit other cases. A fast-changing business may be valued on forecast cash flows. A business that earns little may be valued on its assets. Our guide on how to value a small business explains each one.
3. Cross-check. A careful valuer tests the answer another way. That might mean comparing it with sales of similar businesses, where that evidence exists. Or it might mean checking that the implied return makes sense for the risk. If the two approaches disagree badly, something needs another look.
4. Get to what the owners receive. The figure from steps 2 and 3 usually describes the operating business. To reach the value of the owners' interest, a valuer typically deducts interest-bearing debt and adds cash that the business does not need to run. Our guide to enterprise value and equity value covers this in more detail.
A hypothetical example
This example is made up to show the arithmetic only. The multiple is assumed for the illustration. It is not a benchmark for any industry and should not be applied to a real business.
| Step | Hypothetical amount |
|---|---|
| Reported profit before interest and tax | $180,000 |
| Add back a one-off legal cost | $20,000 |
| Deduct the cost of replacing the owner's unpaid work | $40,000 |
| Maintainable earnings | $160,000 |
| Value of the operations at an assumed multiple of 3 | $480,000 |
| Add surplus cash not needed to run the business | $30,000 |
| Deduct bank debt | $90,000 |
| Hypothetical value of the owners' interest | $420,000 |
Notice how much the adjustments matter. If the owner's unpaid work were ignored, the earnings would look higher and so would the value, but a buyer would have to pay someone to do that work. In a real valuation, the multiple would come from this business's risk and the available evidence. Stock, working capital and other items would also need checking.
What pushes the value up or down?
Anything that makes the earnings more reliable tends to push value up. Anything that makes them less certain tends to push it down. These are the factors valuers and buyers look at most closely.
| Factor | Tends to support value | Tends to reduce value |
|---|---|---|
| Owner dependence | The business runs without you day to day | Customers, skills or relationships sit with you personally |
| Customer concentration | Revenue spread across many customers | One or two customers make up a large part of sales |
| Recurring revenue | Contracts, subscriptions or regular repeat work | Every sale has to be won again from scratch |
| Records | Clean, consistent accounts that match the tax returns | Missing years, mixed private costs, unexplained items |
| Trend | Steady or rising earnings with a clear reason | Falling or erratic earnings |
Owner dependence. If you win the work, do the work and keep the customers, a buyer is paying for something that may leave with you. Documented systems and a capable team reduce that risk.
Customer concentration. Losing one large customer can wipe out a big share of profit. Buyers and valuers allow for that risk, often by applying a lower multiple or by looking hard at the contract terms.
Recurring revenue. Income that renews by itself is more predictable than income that has to be found again each month. Predictability lowers risk.
Records. Good records do not change what the business earns, but they change how much anyone can rely on the numbers. Adjustments without documents behind them are hard to accept.
Trend. A valuer asks whether recent results are likely to continue. A rising trend needs a reason that will last. A one-off good year is not maintainable earnings.
How can I find out what my business is worth?
You have three broad options, depending on how much you need to rely on the answer. A rough figure for your own curiosity needs much less work than a figure a buyer, lender or adviser will read.
A free online calculator. Useful for a rough idea in a few minutes. It applies a formula to the numbers you type in. It does not check or adjust those numbers, and it cannot assess the risks of your business. Our guide on whether free calculators are accurate explains what they can and cannot show.
A Business Value Report. Valuo's streamlined assessment for your own decisions, such as planning or early sale preparation. It analyses your earnings, applies the method that fits and sets out the assumptions and limitations, and a valuer reviews it before it is issued. It is not signed and is not for tax, the ATO, family law, court, lenders or other third parties. Fees start from $995 + GST.
A Professional Valuation Report. A full independent valuation with normalisation adjustments explained, market evidence where available and relevant, a review of the key assumptions, and a detailed report signed by the valuer responsible. It suits a sale or purchase, shareholder arrangements, tax and restructures subject to scope, and situations where another party will read the report. Fees start from $1,495 + GST.
Every Valuo fee is fixed by your annual revenue and the report you choose, and confirmed in writing before you pay. It never depends on the value concluded. Businesses with revenue of $10 million or more receive a fixed fee quoted before any work starts. If tax or legal questions are involved, speak with your accountant or lawyer about what you need.
Get your figure
- See your fee in two taps: Get your fixed fee.
- Compare both reports and every revenue band: pricing.
- See each step from order to report: how it works.
Some situations need a specialist Valuo company. Separation and family law matters go to our dedicated family law practice, Family Law Valuations. Disputes, complex restructures, related-party transfers and shareholder buyouts are scoped by Oliver Group. Healthcare practices are valued by Medival, and early-stage companies by Start-Up Valuations.
Questions
Is my business worth a set multiple of profit?
No single multiple applies to every business. The right multiple depends on how risky and how reliable the earnings are, and it should be supported by evidence. A figure quoted for an industry in general says little about your business in particular.
Is my business worth what I paid for it, or what I have put into it?
Not necessarily. What you paid and what you have invested are history. Value looks forward: it depends on the earnings the business can keep producing and the risk attached to them.
Why does the value of my shares differ from the value of the business?
The business value usually describes the operations before debt and surplus cash. To get to what the owners would receive, a valuer deducts debt and adds cash that is not needed to run the business. A share of the company may also need its own analysis.
Can a free online calculator tell me what my business is worth?
It can give you a rough idea of how earnings and an assumed multiple turn into a number. It cannot check your figures, adjust them for one-off items or owner pay, or assess the risks of your business. Treat the result as a starting point for questions.
How do I get a reliable figure for my business?
Have a valuer review your financial statements, adjust the earnings, choose a method that fits and explain the assumptions. If another party such as a buyer or lender will read the result, ask for a full independent report signed by the valuer responsible.
General educational information, not advice. Examples are hypothetical and do not value a real business. The right treatment depends on the purpose, the evidence and the agreed scope.