How much is my business worth?

Every owner thinking about a sale wants a number. The honest answer is that a business is worth what a willing buyer will pay for the future profit it expects to earn, and that number depends on how reliable that profit looks. Understanding how buyers arrive at a price helps you set realistic expectations and shows you which parts of the business to improve first.

Value starts with sustainable profit

For most trading businesses of the size we work with, the starting point is profit, not assets or revenue. A buyer is purchasing an income stream and wants to know how much the business can reliably earn once you have gone.

That means the reported profit in your tax return is rarely the figure used. It has to be normalised: adjusted to show what the business would earn under a new owner, running normally. Typical adjustments include:

Owner's remuneration. If you pay yourself well below or above what it would cost to employ a manager, the profit is adjusted to a market salary.
Personal expenses. Private costs run through the business are added back, but only where they can be clearly shown.
One-off items. A large legal bill, an insurance payout or a one-time contract may be removed so it does not distort the picture.
Related-party arrangements. Rent paid to your own property trust at above or below market rates is adjusted to a market rent.
Non-operating items. Interest income, investment gains and similar items are usually excluded.

The result is often called maintainable earnings. Depending on the business, buyers may look at EBITDA (earnings before interest, tax, depreciation and amortisation), EBIT, or for owner-operated businesses a measure that includes the owner's own earnings before their salary.

Every add-back you claim is a statement a buyer will test. If you cannot prove it, assume it will not be counted.

Common valuation approaches

Capitalisation of earnings

The most common method for profitable small and medium businesses is to apply a multiple to maintainable earnings. As a purely illustrative example, a business with normalised earnings of $400,000 valued at a multiple of three would be worth around $1.2 million.

The multiple is where most of the judgement lies, and there is no fixed table. It reflects how risky and transferable the earnings are. Multiples quoted in conversation or online are not a reliable guide to your business, which may sit well above or below them.

Asset-based valuation

Where a business earns little above a fair return on its assets, or is being wound down, value may be based on the net assets: equipment, stock and receivables less liabilities. This method also acts as a floor. A profitable business is rarely worth less than its tangible assets.

Discounted cash flow

Larger businesses, or those with predictable long-term contracts, are sometimes valued by forecasting future cash flows and discounting them to today. It is less common for small businesses because the forecasts can be hard to support.

Comparable sales

Information about similar businesses that have sold can give context, but private sale data is limited and every business differs. Treat comparisons as a sense check, not a method.

What moves the multiple

Two businesses with the same profit can sell for very different prices. Buyers pay more where they see lower risk and pay less where they see uncertainty. Factors that commonly push value up include:

earnings that are stable or growing over several years;
a broad customer base with no single customer dominating revenue;
recurring or contracted revenue;
a capable team and processes that do not depend on the owner;
a secure lease with a reasonable term remaining;
clean, consistent financial records;
a defensible position, such as brand, location or specialised skills.

Factors that commonly push value down include heavy owner involvement, customer concentration, declining margins, an expiring lease, poor records and unresolved compliance issues. Our article on the red flags buyers find in your numbers goes into these in more detail.

Price is more than the headline figure

What you receive depends on the terms as well as the number. Consider:

What is included. Is the price for goodwill and plant only, with stock on top at valuation? Are debtors and creditors staying with you? See our article on working capital and stock adjustments.
Deal structure. A sale of shares and a sale of the business assets produce different tax outcomes and risks. Read asset sale vs share sale.
Timing of payment. Part of the price may be deferred, paid through vendor finance, or linked to future performance through an earn-out.
Tax. The after-tax result matters more than the headline. The small business CGT concessions can make a large difference for eligible sellers.

As an illustration, an offer of $1.2 million with $300,000 deferred over two years and dependent on targets is a very different proposition from $1.1 million paid in full at settlement.

Your number and the buyer's number

Owners often value the years of effort they have put in, or the amount they need to retire. Buyers value the future cash the business will produce for them and the risk of that cash not arriving. Neither is wrong, but only the buyer's view sets the market. Getting an independent view of value before you go to market helps you avoid two costly outcomes: pricing too high and watching the business go stale, or pricing too low and leaving money behind.

Steps to take now

Pull together three years of financial statements and current year-to-date figures.
List every potential add-back and the evidence that supports it.
Identify the risks a buyer would see, and decide which you can reduce before a sale.
Get an indicative valuation and use it to plan, not just to set a price.

If a sale is a year or two away, our guide to preparing your business for sale sets out the work that tends to make the biggest difference.

How we can help

Kainos prepares normalised earnings, tests add-backs the way a buyer would, and gives owners a reasoned view of value and of what would improve it. We then advise and represent sellers through negotiation, alongside their lawyer. To talk about what your business might be worth, contact us or read about our business sales and purchases service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.