Quick answer
Most small businesses are valued as a multiple of normalised annual earnings, usually owner-adjusted profit before interest and tax, plus the value of stock and equipment where relevant. Strip out the owner's personal costs, add back a market wage for the work they do, then apply a multiple that reflects risk. Cross-check it against assets, comparable sales and what a lender will fund.
Key points
- The valuation starts with normalised earnings, not the profit figure on the tax return
- The multiple reflects risk: owner dependence, customer concentration, lease security and trend
- Asset value sets a floor for some businesses, but goodwill drives the price of most service businesses
- A lender will not simply accept the agreed price; its own valuer or analysis can come in lower
- Whatever method you use, test whether the debt can be repaid from the adjusted profit
A business is worth what a buyer will pay and what a lender will fund. Those two numbers are often further apart than either side expects, and the gap is where deals wobble.
There is no single correct valuation. But there is a sensible, repeatable process, and following it will keep you from overpaying as a buyer or underpricing as a seller. The sequence below moves from the profit figure to a price, then to the number a lender would actually back.
Step 1: what is the business really earning?
Don’t start with the tax return. Tax profit is shaped by depreciation choices, owner expenses and timing. Start with normalised earnings, the profit a new owner could expect.
Take the last three years of profit and make these adjustments:
- Add back personal or one-off costs run through the business: a family member’s car, a one-time legal bill, a holiday booked as a “conference”.
- Remove unusual income, such as a government grant or a once-only contract.
- Deduct a market wage for the owner’s work. If the owner works full-time and draws little, that gap is a hidden cost. A replacement manager would cost real money.
- Check the trend. Rising, flat and falling earnings deserve different prices even when this year’s profit is the same.
The result is sometimes called owner’s earnings, or EBITDA when depreciation and interest are also added back. Our EBITDA glossary entry explains the term, and how to read your profit and loss statement helps with the starting figures.
Step 2: which valuation method fits?
Three approaches dominate, and good valuers use more than one.
| Method | How it works | Best for | Weakness |
|---|---|---|---|
| Earnings multiple | Normalised earnings × a multiple | Most profitable operating businesses | The multiple is a judgement |
| Asset-based | Value of stock, plant and other assets less liabilities | Asset-heavy or underperforming businesses | Ignores goodwill |
| Market comparison | Recent sales of similar businesses | Common types such as cafés or franchises | Sale data is thin and often private |
An asset valuation tends to set a floor. If a business earns little, it’s worth roughly its assets. If it earns well, goodwill lifts it above that floor, and an earnings multiple takes over.
Step 3: what multiple is reasonable?
The multiple expresses how many years of earnings a buyer will pay for the right to receive them. It isn’t a fixed number, and quotes you see online differ by source. Rather than memorising a figure, understand what pushes it up or down.
Pushes the multiple up:
- Earnings that are steady or growing
- Recurring revenue, such as contracts, memberships or maintenance agreements
- Spread of customers, so no single one is critical
- A long lease with renewal options
- Systems and staff that run the business without the owner
- Industry demand that is stable
Pushes it down:
- Dependence on the owner’s personal relationships or skills
- One customer producing a large share of sales
- A short lease or a landlord who might not renew
- Cash-heavy trade that is hard to verify
- Declining earnings or sector disruption
- Heavy capital spending needed soon
Ask any broker quoting a multiple for the actual sales behind it, and be careful comparing across industries.
Step 4: add the tangible bits
The earnings multiple generally gives you the value of the business with a normal level of stock and plant. Treat these separately:
- Stock is usually priced at cost on the day of settlement, counted by both sides.
- Plant and equipment, if the earnings multiple assumes they’re in decent condition. A key machine at the end of its life should reduce the price.
- Working capital. Does the sale include debtors and creditors, or just assets? Clarify, as it’s a frequent dispute.
Step 5: test the price against repayment
This step is where the valuation meets finance. Whatever the price, ask: can the adjusted profit repay the debt and still leave a reasonable income?
A rough test used by lenders is the debt service cover ratio, which compares annual earnings available for repayments with the repayments themselves. If earnings barely cover repayments, a small dip in sales puts you in trouble. Our debt service coverage ratio calculator lets you run the numbers.
This is also where lenders take a view of their own. They may commission a valuation or build their own analysis, and a figure below the contract price shrinks the loan. Better to find out before exchanging contracts. Tell us the price and the earnings and we can say whether the structure looks workable. It takes about a minute, and no credit check is run.
A worked example: a small dental supplies distributor
This is illustrative. The seller reports $210k net profit. The buyer’s accountant adjusts it:
| Adjustment | Amount |
|---|---|
| Reported profit | $210k |
| Add back: owner’s family car and personal phone | + $14k |
| Add back: one-off legal settlement | + $9k |
| Deduct: market wage for an operations manager | - $95k |
| Normalised earnings | $138k |
The seller asks for a price based on $210k. The buyer works from $138k, a third lower. After considering that the top customer is 30% of sales and the lease has two years left, the buyer argues for a lower multiple than the seller’s broker suggested.
If the agreed price is $450k, the repayment test matters. A loan of $320k repaid over five years would demand annual repayments of roughly $70k to $80k, depending on the lender’s terms. The normalised $138k covers that around 1.8 times, which most lenders find comfortable. Had the buyer accepted the seller’s framing, the same price would have looked safe on paper and been tight in reality. (The repayment range is a rough estimate for illustration; a real quote depends on the lender and structure.)
What if the buyer and seller can’t agree?
Valuation disputes often come down to the future. The seller believes growth is coming; the buyer pays only for what is proven. Several structures bridge this:
- Earn-out. Part of the price is paid later, depending on performance.
- Vendor finance. The seller accepts part of the price over time, which aligns them with the business’s survival. See vendor finance when buying a business.
- Independent valuation. Both sides agree to share the cost of a qualified valuer and accept the result.
Common valuation mistakes
- Using revenue instead of profit. Sales are vanity; earnings are what you buy.
- Forgetting the owner’s labour. The most common error in owner-run businesses.
- Relying on a rule of thumb alone. Industry shortcuts are starting points, not answers.
- Not testing the lease. Goodwill can vanish when a lease does; check it through due diligence.
- Ignoring how the lender will view it. The loan is capped by their view, not yours. See also how valuations work for business loans.
From a number on paper to money in the account
A defensible valuation is the foundation of any purchase loan. Banks can offer excellent terms where the business and security fit, so approach them first and take a good offer seriously. If the bank’s number comes in below the price, or the timing doesn’t work, we can look at the other ways to close the gap.
Our form takes about a minute, and enquiring doesn’t touch your credit file. We don’t forward your details to a crowd of lenders, which keeps your phone quiet. A person reads what you’ve sent, thinks about the valuation, the security and the timeline, and calls you. Please fill it in accurately, with the true earnings and price, so the first option we put forward fits your numbers.
Frequently asked questions
How is a small business valued in Australia?
Usually by applying a multiple to the business's normalised earnings, often called owner's earnings or EBITDA, then adjusting for stock, plant and working capital. Other methods include asset-based valuation and comparison with recent sales of similar businesses. There's no fixed formula, and the multiple depends on risk and industry.
What is a normal multiple for a small business?
There isn't one number. Multiples vary widely by industry, size, owner dependence and the quality of the earnings, and published ranges differ between brokers. Treat any single multiple you hear with caution and ask for the sales it is based on.
What does normalising earnings mean?
It means adjusting the reported profit to show what a new owner would actually earn: adding back one-off or personal expenses, removing unusual income, and deducting a market wage for the owner's labour if the owner isn't being paid one.
What is EBITDA?
Earnings before interest, tax, depreciation and amortisation. It's a way of comparing the operating profit of businesses regardless of how they are financed or taxed. For very small owner-operated businesses, brokers often use owner's earnings instead, which adds back the owner's wage as well.
Do I need a professional valuation?
For a significant purchase, yes. A qualified business valuer or accountant brings an independent view, and a lender may require one for a loan. For a quick sense-check, you can do the maths yourself using the steps in this guide.
What if the lender values the business lower than the price?
The loan may be smaller than you expected, leaving a gap you need to fill with a larger deposit, vendor finance, extra security or a renegotiated price. This is a common reason for deals to be re-cut late, so test the valuation early.