This page explains how valuation generally works, so you can judge any offer, from anyone. It is general information, not a valuation of your business.
Profit, not sales
One of the most common questions owners ask is what a business with $1 million in sales is worth. The honest answer is that it depends on the profit. Two businesses with the same sales can be worth very different amounts. One might make $100,000 and the other $400,000. Buyers pay for profit they can rely on, and turnover on its own tells them very little.
Step 1: Pick a fair period
A buyer should look at a period that reflects where the business is heading, not just one lucky or unlucky year. If last year had a one-off contract or a flood, that gets taken into account.
Step 2: Adjust the profit
Most owner-run businesses carry costs and quirks a new owner won't have. Fair adjustments go both ways.
Added back, which increases the profit a buyer counts:
- Personal expenses run through the business, such as a car or phone the family uses.
- One-off costs, such as a legal dispute that is now settled.
Taken off, which reduces it:
- A fair wage for your role, if you've been paying yourself little or nothing. Someone will have to be paid to do your job after you leave.
Your accountant can help you list these. Keep the evidence, because any buyer will ask.
Step 3: Apply a multiple
The adjusted profit is multiplied by a figure that reflects the risk and the outlook for your kind of business. For most stable small and medium businesses, that is about 3 to 5 times. The right figure for yours depends on your industry and on the things below.
A simple example: a business with $2 million of adjusted operating profit, valued at 4 times, would be worth about $8 million. Treat this as arithmetic, not a quote.
What moves you up or down the range
Things that usually push the number up:
- Customers who come back year after year, and no single customer who makes up a big share of sales.
- A long, steady record. Ten years or more says the demand is real.
- Healthy margins, held through good years and bad.
- A team who can run the day to day without you.
Things that usually push it down:
- The business depends on you personally, your relationships or your licence.
- Profit that jumps around from year to year.
- Large equipment that will need replacing soon.
Your business doesn't need to be perfect. No business is. If you've been running it successfully for years, that already tells a buyer a lot.
Get more than one view
Your accountant, an independent valuer or a broker can all give you a view of value, and it is worth hearing more than one before you decide. Any buyer, us included, should be able to show you how they reached their number. If a buyer cannot explain it in plain English, ask again. More on whether you need a broker.
What you actually take home
The headline price isn't the whole story. Three things decide what reaches your bank account.
Cash in the bank. With us, the cash sitting in the bank at settlement is yours to keep. With any buyer, check how cash is treated before you agree a price.
Working capital. That is the stock on hand, the invoices customers still owe you, and the bills you owe suppliers in day to day trading. A normal level is usually left in the business as part of the sale, and agreed up front.
How the price is paid. Some offers pay only part of the price at settlement and the rest later, or only if the business hits targets. A higher headline price with half paid later can be worth less than a lower price paid in full. See will I get paid in full when I sell.
Questions to ask your accountant about tax
Tax can change what you keep a great deal, so ask early, before any contract is signed.
- Do I qualify for the small business capital gains tax concessions? Under the current rules there are four, including a 15-year exemption for owners aged 55 or over who are retiring, and a retirement exemption with a $500,000 lifetime limit. Larger businesses don't always qualify, because of turnover and net asset limits.
- Have any announced changes to capital gains tax affected my position, and when would they apply?
- How does the way the sale is structured affect my tax?
The ATO website explains the concessions. This is general information, not tax advice.
How we value a business
We pay fair market value, and we explain how we got there. We choose a period that best reflects the future of the business, adjust for one-offs so you're not penalised, research the multiples specific to your industry and business type, and work out where your business sits within that range.
Within two weeks of our first conversation, you'll have our offer in writing, with a clear price. It walks you through everything in plain English, so you know exactly why we landed where we did. To get there, we only need a few hours on the phone and your high level financials: profit and loss statements, balance sheet and a revenue breakdown. The conversation and the written offer cost you nothing.
We pay cash at settlement wherever we can, and we generally don't rely on earn-outs or deferred payments.