How To Value A Business

Whether you’re preparing to sell or are seeking investment, understanding the true value of your business is just one of the most important financial decisions you’ll make. A professional valuation isn’t just an estimated number – it’s an accurate reflection of your company’s financial position, health, growth potential, and operational resilience. Accurate valuations help business owners negotiate better deals and attract capital, helping to plan strategically for the future. But with so many variables at play, determining what your business is worth can be difficult. Today, we’re looking at the key information you need to correctly value your business, no matter what industry you’re in.

Key factors influencing business value

A business’s value extends beyond just profit margins. Investors and valuers will look at a range of operational, financial, and strategic factors to determine your company’s worth. Here are the most common key influential factors:

Financial performance and profitability

At its core, your business’s value is built on its ability to generate sustainable profits. Financial statements, including profit and loss reports, balance sheets, and cash flow statements, provide a clear window into your company’s financial health. Consistent revenue growth and strong profit margins usually lead to higher valuations because they show potential buyers and investors that they’re getting a better deal. On the other hand, businesses with lower profitability and erratic performance might be seen as too much of a risk for investors, therefore lowering your valuation.

Market position

If your business has a clear niche or unique product offering, it might be valued more highly than a business with generalised stock. It doesn’t just have to be stock, either – it could include your brand recognition, exclusive supplier-to-customer contracts, geographic dominance, or technological advances. Anything that helps you defend your market share against competitors and industry disruptors will play a huge role in determining the final value of your company.

Quality of your customer base

Not all customer bases are considered equal when it comes to business value. Businesses with large and diversified customer bases are usually valued higher than those that rely on a few major clients. If you have a high customer retention rate and strong customer satisfaction, you’ll typically score a higher value than without them. Similarly, if your business allows you to collect customers through a recurring revenue model (like a subscription or service agreement), it’ll command a higher value. Buyers want to know that they’re getting a strong customer base along with their new investment.

Operational efficiency

The more efficient your business operations are, the better your profitability and scalability will be. Buyers and investors will favour businesses with well-documented systems and processes, as this can reduce the reliance on the owner or employees, so they don’t have to worry about extra training or turnover costs. To make your business as efficient as possible, you can streamline your processes, create effective supply channels, and make sure your management structures are as strong as possible.

Industry trends and economic conditions

Broader market trends and the overall state of the economy also shape your business’s valuation. High-growth industries like renewable energy, healthcare, and digital services often use higher multiples, equalling a better valuation. On the other hand, businesses in declining sectors or volatile markets might be valued lower because of the risk associated with investing in them.

Intangible assets

In today’s economy, which is more knowledge-driven than ever before, intangible assets like intellectual property, trademarks, brand reputation, and proprietary systems can represent a higher value for businesses that hold them. While intangible assets are harder to quantify, they can set you apart from the rest of the market and offer competitive protection, increasing market value overall. Intangible assets are often considered ‘goodwill’ in the valuation process, so they should count for something when using an expert valuation service.

Valuation methods specific to businesses

There’s no one-size-fits-all approach to valuing a business. The most suitable approach for your specific company depends on its size, sector, profitability, and future outlook. Here are four of the most commonly used valuation methods to consider:

Multiple of earnings (EBITDA) method

The EBITDA method involves applying a market-derived multiple to your business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). The multiple is usually adjusted depending on the industry you’re in, business size, risk factors, and growth potential. Without knowing which industry you’re in, it’s difficult to give an estimated EBITDA. However, in Australia, most small to medium-sized businesses sell for 2x to 5x EBITDA. Faster-growing and highly profitable businesses command higher multiples, while smaller businesses that are still finding their footing tend to go for lower multiples.

There are lots of pros to the EBITDA method, which is why it’s one of the most popular options to go for. It focuses on your core business profitability, which is what most potential buyers want to know right off the bat, and it also allows direct comparison with similar businesses. However, it might not utilise your asset values or growth potential if you’re an early-stage business.

Revenue multiple approach

The revenue multiple method requires you to apply a multiplier to a business’s annual turnover. The multiple you use will vary widely depending on the industry you’re in, ranging from 0.3x for lower-margin industries to 2x or higher for intellectual property-driven companies. It’s best used for fast-growing businesses or those with inconsistent profits but strong revenue, so not all business owners will have this one as their first choice.

The biggest benefit of this method is that it’s easy to calculate, so great for beginners. It also works well as long as your business has predictable revenue. However, it ignores your profit margins and cost structures, which potential buyers are often very interested in. Ignoring these two metrics can also leave your business undervalued if you’re still getting your footing in the industry.

Discounted Cash Flow (DCF) method

The DCF method is one of the favoured methods thanks to how in-depth it is. It utilises your future cash flow projections for the next few years and discounts them back to present value using a risk-adjusted discount rate. This takes your business’s future growth, capital investment, and operational risks into account, making it a more extensive method of working out the value of your business. It’s best for businesses that have reliable financial forecasts or long-term contracts, as they’ll be able to accurately estimate their future cash flows.

The obvious benefit of this approach is that it captures future earning potential, which is a huge driver in valuations. It also incorporates capital expenditure and working capital needs, but it’s also highly sensitive to assumptions about the future. You’ll also need detailed financial forecasts to reliably forecast future cash flows, as without this, your valuation will be much less accurate.

Net profit approach

The net profit approach involves applying a multiple to your business’s adjusted net profit, taking into account your wages as the owner, discretionary expenses, and one-off costs. This method is another simple one ideal for beginners, and it’s commonly used for sole traders, family businesses, or owner-operated enterprises. The valuation is transparent and shows potential buyers and investors exactly what they want to see – all about your profits.

The benefits of this approach are that it’s very easy to apply and therefore great if you don’t have much experience valuing your business. It also focuses on the actual profit to the owner, which is a valuable metric to buyers. However, it might ignore intangible asset value or future growth opportunities, leaving you with an inaccurate valuation as these important details have been missed.

Common mistakes when valuing businesses

Even experienced business owners can fall into valuation traps. Here are some of the most common mistakes to look out for when valuing a business:

Overestimating the value of goodwill

While goodwill certainly does add value to a business, it’s often overstated when it comes to valuations. Goodwill is an umbrella term for your reputation, brand, and customer relationships – all of which are intangible assets. As they’re intangible, it’s up to you to put an accurate value on each to prevent overestimating how much it’s actually worth. Buyers are often cautious of paying premiums without tangible returns or protection, such as exclusive contracts or intellectual property, so valuing goodwill too high might leave you with less interest.

Ignoring working capital requirements

Even if your business is profitable, it might still require significant working capital to operate, particularly in inventory-heavy or seasonal industries. Valuations that overlook how much working capital your business needs can mislead buyers about future cash flow. This will lead to longer, messier negotiations, or buyers might pull out altogether after feeling duped.

Failing to adjust for non-recurring costs

Your valuation should exclude unusual, one-off expenses or revenues that won’t occur again in the future. This includes legal settlements, property sales, or temporary government grants. Including these costs can lead to an inaccurate valuation, especially if you’re using future cash flow to calculate it.

Neglecting owner dependence

Businesses often owe plenty of their success to their owners – you’re the one who started it all, after all! However, if the company still relies heavily on owner expertise, personal relationships, or daily involvement, an external buyer might find its value lower because once you remove the owner from the equation, the business’s performance falters. Your valuation should account for this risk, or, even better, consider transferring your knowledge and systems to another employee who can carry on your hard work once you’re gone.

Using outdated industry multiples

Market multiples change over time based on industry conditions, buyer appetite, and economic cycles. Relying on old benchmarks can lead to unrealistic valuations, so it’s important to use up-to-date market data. Utilising a valuation expert in your industry can help make sure you’re using the right multiple in accordance with the valuation method you’re using.

Enhancing your business’s valuation

Before seeking investment or planning a sale, there are several steps a business owner can take to increase their company’s market value:

• Formalise contracts and agreements: Secure written agreements with suppliers, customers, and key staff to show buyers, as this will guarantee future revenue streams for them.
• Diversify your revenue streams: Reduce your company’s reliance on one product, customer, or market, as this can lead to a shutdown of operations if you’re too reliant on one thing that goes under.
• Document systems and processes: Document your systems to make operations less dependent on just one owner or a few key individuals, so more employees can step in and continue operations seamlessly.
• Invest in branding and online presence: A strong, professional digital profile increases market confidence and attracts more potential buyers.
• Improve cash flow management: There are several ways to do this: Accelerate receivables, manage inventory, and negotiate supplier terms.
• Reduce unnecessary expenses: Clean your financial statements to ensure they’re free from personal or non-essential costs.
• Address legal and compliance risks: Resolve any outstanding legal matters or compliance issues before starting the valuation process so these don’t lower the overall price.

FAQs

How long does a business valuation take?

Most valuations take between two and four weeks to complete. However, this depends on a number of extenuating factors, such as the business’s size, complexity, and availability of financial records. The more available your details are, the quicker a valuation can be completed. If you’re in a time crunch, we recommend hiring a business valuation expert.

Are online business valuation calculators reliable?

Online calculators can give you a rough estimate of your business’s value, but they’re not foolproof. They can often miss important operational, contractual, and intangible factors. For this reason, we highly recommend a professional valuation for significant transactions when preparing to sell or seek investment.

Can I value my business based solely on assets?

Yes. An asset-based valuation is suitable for asset-heavy businesses, but this method might undervalue service-based or IP-driven companies with strong cash flows and brand equity. It depends on the nature of your business as to how effective this valuation method could be.

What’s included in goodwill?

Goodwill typically covers brand value, customer relationships, business reputation, intellectual property, and operational systems. Anything that you believe adds value to your business without a tangible way to determine its worth can be considered ‘goodwill’ in the world of valuations.

Get in touch with a business valuation expert near you

Determining your business’s true value requires a combination of financial expertise, market insight, and operational analysis. Our experienced valuation specialists work with businesses of all sizes across Australia, delivering independent, market-based valuations for sales, mergers, financing, and succession planning.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
• Get in touch with our business valuation experts in Sydney
• Get in touch with our business valuation experts in Melbourne
• Get in touch with our business valuation experts in Perth
• Get in touch with our business valuation experts in Adelaide
• Get in touch with our business valuation experts on the Gold Coast
• Get in touch with our business valuation experts on the Sunshine Coast