How to Value a Business

The methods buyers actually use, the things that lift or cut your value, and a worked example you can follow with your own numbers. Written for owners, not accountants.

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What a valuation really measures

A business valuation answers one question: what would a willing buyer pay a willing seller for this business today? Not what you hope it is worth, and not what it cost you to build. What someone would actually hand over.

The first distinction to understand is between the value of the business (the enterprise) and what you walk away with. If a business is worth $1 million but carries $400,000 of debt, the owner is not $1 million richer at settlement. Buyers and valuers usually quote the enterprise figure, then adjust for debt, cash and other items to reach the equity price. When you compare your number to someone else's, check you are comparing the same thing.

The second distinction is between value and price. Value is what the business is worth on the evidence. Price is what a particular buyer agrees to pay, and it can sit above or below value because of urgency, competition, or what the buyer plans to do with it. This guide is about estimating value. A negotiation sets the price.

The three ways businesses are valued

Professional valuers draw on three broad approaches. For most profitable small and medium businesses, the first one does the heavy lifting, but you should recognise all three.

1. A multiple of earnings (the market approach)

Value = sustainable earnings x a multiple. The buyer looks at what the business earns year after year, applies a multiple typical for businesses of that type and size, and adjusts for anything that makes yours more or less attractive. If a business earns $300,000 in EBITDA and similar businesses trade at 3 to 4 times, the indicative range is $900,000 to $1.2 million. This is the method the free calculator uses, and it is the dominant method for profitable private businesses.

2. Discounted cash flow (the income approach)

A forecast of the cash the business will produce over coming years, brought back to today's dollars using a discount rate that reflects the risk. Done properly, this is the most rigorous method, which is why it is common for larger companies, unusual businesses, and situations with long contracts or big expected changes. Its weakness for a small business is the forecast itself: small business forecasts are often hope dressed as arithmetic, and a small change in the assumed growth rate swings the answer a long way.

3. The assets (the asset-based approach)

What the land, buildings, equipment, stock and other assets would sell for, less what is owed. This sets a floor for asset-heavy businesses (property, transport, manufacturing) and becomes the whole story for struggling ones, where the going-concern value is lower than the parts. For a profitable services business it usually says little, because most of the value is in customers, staff and know-how, none of which appear as assets on a balance sheet.

Which one applies to you? If your business consistently earns a profit, buyers will think in multiples of earnings. If it is losing money or just breaking even, the asset approach takes over. Discounted cash flow appears when there is something unusual to model. Most owners can ignore everything except the first one.

Step 1: work out the real earnings

The multiple method prices sustainable earnings: what the business can keep producing without special luck. The last year on its own can mislead, and three years of accounts are better than one. A simple way to balance recency and reliability is to weight the most recent year most heavily.

Before you multiply anything, the earnings need to be normalised: adjusted so they show the business as a buyer will see it. The usual adjustments are:

• Owner salary reset to a market rate. If you pay yourself $250,000 but the business would need to pay someone $120,000 to replace you, earnings are overstated by $130,000.
• One-off items removed. A legal settlement, an insurance payout, a once-in-five-years equipment sale.
• Personal expenses removed. The family car, personal travel, the home internet, anything not really a business cost.
• Related-party rent checked. If you own the premises and charge the business above a market rent, earnings are understated.
• Interest, tax, depreciation and amortisation added back if you are working in EBITDA. (Our glossary entry on EBITDA walks through the formula.)

Normalisation is where amateur valuations most often go wrong, usually in the owner's favour. It is also why two people can look at the same accounts and get very different answers.

Step 2: choose the multiple

The multiple is the number everyone argues about. It varies by industry, size, growth and risk, and small movements in it move the final answer a long way, which is why serious valuations justify the multiple rather than just naming it.

An industry multiple is a market cross-check, not a formula. It tells you roughly where businesses like yours have traded. It does not tell you what yours is worth. Two businesses in the same industry can sell at very different multiples because of size, growth, recurring revenue, customer concentration, owner dependence, depth of management, quality of earnings, how much equipment needs replacing, market position and the deal climate at the time.

Make sure you compare like with like

EBITDA multiple

Earnings before interest, tax, depreciation and amortisation, after paying the owner a market salary. The usual basis for established Australian and NZ businesses, and the basis used in the tables below.

EBIT multiple

Like EBITDA but after depreciation and amortisation. Because the earnings figure is smaller, the multiple is higher for the same price.

SDE multiple

Seller's discretionary earnings adds the owner's whole salary back to profit. Common for small owner-operated sales, especially in the US. SDE multiples look lower but describe a bigger earnings figure, so never mix them with EBITDA multiples.

Revenue multiple

Price divided by sales. Mostly used for fast-growing or loss-making businesses. It cannot be converted into an earnings multiple without knowing the margin.

Size matters more than most owners expect

Larger, professionally managed businesses attract higher multiples, because buyers see less risk and more reliable earnings. UK mid-market research shows the effect clearly: average multiples of about 3.6x EBITDA at £200,000 of EBITDA, 6.8x at £5 million and 8.2x at £10 million (Dealsuite, UK&I M&A Monitor, August 2026). Treat this as an illustration of the size effect, not a benchmark for your business. Figures from private equity backed and mid-market deals are typically higher than ordinary owner-operated sales and should not be applied to a small business directly.

Indicative EBITDA multiples in Australia, by size

Enterprise value divided by normalised EBITDA, debt-free and cash-free, going concern. Source: Oliver Group, EBITDA Multiples by Industry Australia. The source rates its own confidence as medium for most sectors and low for wholesale and retail.

New Zealand: completed sales

About 60 completed New Zealand sales with enterprise values between roughly NZ$1.5 million and NZ$20 million. Overall median 3.6x EBITDA, range about 2.6x to 5.3x. Source: Rockfield, Definitive Guide to Selling a New Zealand Business. Sector samples are small, so read them with care; other sectors had too few sales to report.

The same NZ data shows owner dependence in action: businesses that ran without their owner sold at a median 3.8x, against 3.3x for owner-dependent ones.

Important: indicative benchmarks only. Multiples vary materially by business size, country, growth, recurring revenue, customer concentration, owner dependence, management depth, earnings quality and market conditions. These ranges are a cross-check, not a substitute for a valuation of your business, and not financial, accounting, tax or legal advice. For a number you can rely on, use a qualified valuer or your accountant.

Sources

• Australian table: Oliver Group, EBITDA Multiples by Industry Australia
• New Zealand table and owner dependence figures: Rockfield, Definitive Guide to Selling a New Zealand Business
• UK size illustration: Dealsuite, UK&I M&A Monitor, August 2026

Within the range, three factors push you up or down faster than anything else, and they are the same three the calculator asks about:

Owner dependence

Can the business run without you? A business that needs the owner for everything is worth meaningfully less, because the buyer is buying a job.

Customer concentration

If one customer is 30% or more of sales, the buyer inherits that risk, and the multiple drops to reflect it.

Growth trend

Growing revenue supports the upper end; declining revenue drags the whole range down.

What lifts your value, and what cuts it

Beyond the headline multiple, buyers price risk. These are the factors that show up in almost every small business transaction.

Value lifters

• Recurring revenue: subscriptions, retainers, service contracts or repeat customers who come back without being chased
• Margins above the industry norm, sustained over several years
• Growth that does not depend on the owner working more hours
• A team and documented systems, so the business runs without you
• Customers spread across many names, none over about 10% of sales
• Clean, accurate, up-to-date accounts a buyer can trust
• Written agreements: leases, contracts, supplier terms

Value killers

• Key person risk: the business stops, or slows badly, if you step away
• One customer dominating sales, or a handful that could leave together
• Revenue in decline, or growth bought with shrinking margins
• Owner salary set far above or below a market rate, distorting earnings
• One-off events dressed up as earnings: a big job, an insurance payout, a COVID grant
• Messy books, missing records, or figures that only you can interpret
• Unrecorded liabilities: overdue super, holiday pay, tax debts, disputed invoices

Notice the pattern: almost every lifter is about reducing the buyer's risk and proving the earnings will continue without you. That is the whole game.

A worked example you can copy

Here is the method end to end with simple numbers. The calculator below does exactly this arithmetic.

The business

A professional services firm. The owner makes the big decisions but the team runs the day to day. No customer is more than about 10% of sales.

1. 1 Weight the earnings 3 : 2 : 1 toward the most recent year. (240,000 x 3) + (210,000 x 2) + (180,000 x 1) divided by 6 = $220,000 of weighted EBITDA.
2. 2 Check the growth trend. Revenue has grown about 9.5% a year, so the multiple gets a modest upward nudge.
3. 3 Start from the industry range and adjust. Professional services sits at 2.5x to 4.5x. Owner dependence is moderate (no adjustment), concentration is low (+0.25x), growth is above 10%? No, 9.5%, so no growth adjustment here. Multiple range: 2.75x to 4.75x.
4. 4 Multiply. Low: 220,000 x 2.75 = $605,000. Mid: 220,000 x 3.75 = $825,000. High: 220,000 x 4.75 = $1,045,000.
5. 5 Read the result honestly. A wide range is normal. The point of the exercise is not the midpoint, it is understanding which end you are closer to and why.

Now run it on your own numbers

Enter three years of revenue and profit, answer two quick questions, and get an indicative range. Nothing you type is saved.

Australia (multiples sourced from Australian data)

EBITDA is profit before interest, tax, depreciation and amortisation, after paying yourself a market salary. If you only know your net profit, ask your accountant for the EBITDA figure; the two are not interchangeable.

Indicative only. Multiples are Australian market benchmarks (Oliver Group) and vary by size, country and market conditions. Not a valuation and not financial, accounting, tax or legal advice. Please read the important notice below.

If you are the buyer, the maths runs the same way

Everything in this guide works from the other side of the table too. When you value a business you want to buy, you estimate its normalised earnings, apply a multiple, and stress-test every assumption. Two things deserve extra attention as a buyer:

Earnings quality. Ask for three years of accounts and tax returns, and trace the numbers back to bank statements. Look for revenue that only exists because of the owner's personal relationships, sales that are really one-off projects, and costs that will not disappear just because the business changed hands.

What happens after settlement. The premium multiples go to businesses that keep performing without the seller. Negotiate a handover period, get the key relationships documented or contracted, and price the risk of anything that depends entirely on the person you are buying from.

Selling one day? Start preparing now

The businesses that sell well prepared for it years ahead, not weeks. A practical checklist:

Take the guide with you

The full guide, formatted as a clean PDF you can print, save or share with your business partner, accountant or family. No email required, nothing to fill in.

From an estimate to a number built on your real accounts

Everything above is arithmetic on numbers you type in by hand. Advisorli takes it several steps further: connect your accounting (Xero, QuickBooks, MYOB, Sage or Reckon) or upload a spreadsheet, and the same valuation thinking runs on your actual figures.

A real valuation

A rolling 12-month valuation from your connected accounting data, refreshed as your numbers change.

Business Health Score

A 0 to 600 score built on the Altman Z-Score, showing the financial strength buyers and lenders actually look at.

What to fix first

AI recommendations that show what is pulling your value down and what to do about it.

Free for 48 hours, full access. No credit card required.

This guide is general information only. It is not financial, accounting, tax or legal advice, and the indicative ranges it describes are not a valuation of any particular business. Do not rely on it for any transaction, negotiation, dispute, tax position or legal purpose. Seek advice from your accountant or a qualified valuer before acting on any figure. Advisorli is operated by Jazoodle Pty Ltd.

Frequently Asked Questions

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