How to value a small business in Australia

Do you know what your business is worth, or only what you need it to be worth?

Most owners carry a number around in their head. It usually comes from a friend's sale, a figure a broker mentioned over coffee, or the amount needed to retire. None of those is a valuation.

If you are working out how to value a small business in Australia, the first thing to accept is that the buyer sets the price, not you. Your job is to understand how they will get there, and to fix what drags their number down before they find it.

That gap between the number in your head and the number on the offer is where most sales stall. It is common, and it is fixable.

Why the number in your head is usually wrong

The owner's number is built from effort. The buyer's number is built from risk.

You remember the nights, the loans, the year everything nearly fell over. The buyer sees none of that. They see a stream of profit, how reliable it looks, and how much of it walks out the door with you.

So the real question is not what you put in. It is what a stranger can take out, and how sure they are that it will keep coming.

How to value a small business in Australia: the three methods

The government's own guide to selling your business on business.gov.au sets out three broad ways to value a business. Most small business sales use a blend, with one method doing most of the work.

Method	How it works	Where it fits
Market comparison	Compare your business with similar ones for sale or recently sold.	A sense check on price. The guide is clear it is not a formal valuation.
Return on investment	Use net profit to work out what a buyer can pay and still earn the return they want.	Most profitable, owner-run businesses. This is where the multiple lives.
Net worth of assets	Assets minus liabilities, including intangibles such as goodwill.	Asset-heavy businesses, or ones with thin or uneven profit.

For most owner-run businesses, the return method decides the price. The Queensland Government's guide to valuing a business gives the formula plainly: net annual profit divided by the buyer's required return, multiplied by one hundred. A business making $100,000 for a buyer who wants a fifty percent return is worth $200,000.

That required return is the multiple turned upside down. A buyer who wants their money back in two years is paying two times profit. A buyer who is comfortable waiting five years is paying five times. The safer the profit looks, the longer they are willing to wait.

The multiple is not a market rate you look up. It is the buyer's judgement of your risk. I wrote more on that in the multiple is the buyer's verdict, not yours.

Start with the profit a buyer will actually get

Before any method works, you need the right profit figure. This is where most owner valuations fall apart.

Many owners pay themselves little or nothing and take the rest as profit. A buyer will not accept that. They will either work in the business themselves or pay someone to do your job, and that cost comes off the top.

The Queensland guide calls this a fair owner salary: what you would pay someone else to do the hands-on work, including super. Its example is blunt. A business showing $100,000 profit, with a $90,000 fair salary deducted, leaves about $10,000 of real profit.

That is not a business worth $200,000. It is a well-paid job with a lease attached.

The fix is to recast your accounts the way a buyer will. Take each of the last three years and adjust for:

• A fair salary for every role you fill. If you do the books, the buying and the sales, cost all three at market rates.
• Personal costs run through the business. The car, the phone, the family member on the payroll who does not work there. Add them back, and be ready to prove each one.
• One-off items. A legal dispute, a fit-out, a bad year with a clear cause. Buyers accept genuine one-offs. They do not accept a one-off that happens every year.
• Rent at market. If you own the premises and charge yourself below market rent, a buyer will price in the real rent.

The adjusted figure is the profit a buyer is actually buying. Everything else follows from it.

What moves the multiple up or down

Two businesses with the same profit can sell at very different prices. The difference is what sits underneath the number.

The Queensland guide notes that buyers will look at reliance on specific people, what happens when the owner leaves, long-term contracts, leases, licences and the industry outlook. Each of those either protects the profit or puts it at risk.

The biggest one is you. If customers, suppliers and staff all run through you, the buyer is pricing a business that may not survive your departure. I covered this in founder dependency is a valuation discount.

After that, buyers look at customer concentration, the length and terms of your lease, whether your margins hold over several years, and how clean your records are. The same guide says buyers typically ask for five years of financial statements where they exist. Messy books do not just slow a sale. They lower the price, because uncertainty is a cost.

A clean, transferable profit earns a longer wait. An uncertain one earns a shorter one.

The price is not what you keep

A valuation tells you the price. It does not tell you what lands in your account.

In Australia, capital gains tax applies to most business sales. The ATO's CGT discount lets Australian resident individuals reduce a capital gain by fifty percent if they have owned the asset for at least twelve months. Companies cannot use that discount.

On top of that, the small business CGT concessions can reduce or remove the gain if you qualify. One of the basic conditions is either an aggregated turnover under $2 million or passing the maximum net asset value test of $6 million.

How you hold the business, and how the sale is structured, can change your after-tax result more than a small change in price. Talk to your accountant before you agree a number. More on this in a sale is not money in the bank.

Why I value a business this way

I use this method because I have been on both sides of the table.

I have bought businesses with borrowed money and sold them. I sold a venue for about 200% above what I paid for it. That result did not come from a clever pitch on the day. It came from what the buyer could see in the numbers and the operation by the time we sat down.

Every price I have achieved started with the same discipline. Look at the business through the buyer's eyes first, fix what they will mark down, and only then talk about price.

Owners who start with the price argue. Owners who start with the profit negotiate.

Do this before Friday

Open your last three years of profit and loss statements. Add one line to each: a fair market salary for every role you personally fill. Then look at the profit that is left.

That figure, not the one on your tax return, is the starting point for what your business is worth.

Thinking of selling your business, or buying the next one?

If you want a straight read on what your business is worth and what would move the number, book a free face-to-face consultation with me (JZ). We will look at your profit the way a buyer will. Book your free consultation, or read how I work with owners on the exit page.