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Business Valuation – how much is my business really worth?

This is a question any business owner would ask. At some point the time comes to cash in on the investment they have built in the business and that can come for many different reasons. Most commonly a business owner might feel they have taken the business as far as they can and to progress require investment funds, or it could simply be due to retirement. Whatever the reason, a business is only worth what a willing buyer is prepared to pay and they should be realistic about what that number is.

A business valuation is based on several key principles. While tangible assets like property, equipment, and vehicles hold individual value, what truly matters to a buyer is the business’s earning potential. Think of it like a cash machine—money and resources go in, and profits come out. The real value lies in how efficiently the business turns inputs into profits. Buyers are willing to invest in a business that can generate more money than they pay for it, which we call a “return.” Essentially, the price a buyer is willing to pay reflects the business’s perceived ability to generate future profits—this is its true “value.”

A common approach to estimating your business’s value is the Earnings Multiple Method. Essentially this is Earnings times a multiple. For example, if a business earns $1 million per annum, and the multiple is 3 times, then the value is $3 million. This will then be adjusted to allow for Assets and working capital. A business owner will want to maximise value, so the question is how you determine the Earnings and the multiple.

Earnings is the profit and loss of the business. To arrive at average earnings for the calculation there is some flexibility. Historical results are runs on the board so they will be more heavily weighted than forecasts, similarly more recent results will also gain more weighting. There also may be some argument why you would exclude certain results from the calculation, an example of this would be a Covid year where the results are not truly reflective of business performance and management. Taking these factors into account, you might take 3 years average earnings, or 4 years, and you might even include a year’s forecast so long as it was consistent with how the business had been performing.

The multiplier is determined by the market. The question is how you arrive at what the market is or what a purchaser is prepared to pay. A valuer will look at recent sales of similar businesses, drawing direct comparisons between your business and others that have been sold can be tricky—sometimes even impossible—due to differences in size, industry, financial health, and strategic positioning.

As a general rule of thumb, multiples typically range between 3 and 5 times earnings, but this can vary. Certain industries, such as technology, have historically attracted higher multiples due to strong buyer demand. For example, a few years ago, many IT businesses commanded significantly higher valuations because investors were actively seeking them out.

The principles outlined here are general concepts and should not be considered financial advice. If you’re seeking a specific valuation, consulting a professional business valuer is essential. The purpose of this discussion is to provide insight into how business owners can enhance their company’s value and achieve a higher valuation.

Lets consider each component –

Assets. A business owner buys the assets, they depreciate or maybe appreciate in the case of property, but essentially you might get back what you pay. The business owner has very little control or input.

Multiplier. This is determined by the market or what a willing buyer is prepared to pay. Again, a business owner has very little control over this figure as it is determined by the market, possibly recent sales and most importantly what a buyer is prepared to pay.

Earnings, the profits the business makes. The business owner has absolute control over this and control over profit. This is really the only way a business owner can influence value – by setting up and managing a well-functioning business that delivers profits that increase year on year. This contributes to the Earnings calculation to which a multiplier is applied and you have the value. Consistent returns may even assist with achieving a higher multiplier.

The message is clear – if a business owner is considering an exit then the process ideally needs to start 4-5 years out from the sale. The business performance over this next 5 years and profits generated is the key factor that will determine the value, and the only real factor over which the business owner has control. The plan needs to be how the business owner will maximise the returns over that period, to maximise the Average annual earnings and ultimately the value. Whilst you can sell the business at any time, historical earnings will be locked in and they cant be changed or influenced. If you start the process later, don’t be too concerned, this is consistent with how a business should be run – to maximise profits !


About Brian Doughty:

Brian Doughty is the founder of the Outsourced CFO, a part-time CFO service for small—to medium-sized businesses. Brian’s experience in large corporations and small businesses is unique, and it has enabled him to develop a simple-to-understand set of tools that will help business owners engage staff, monitor performance, and achieve their goals. For more information, visit www.theoutsourcedcfo.com.au.

Founder of the Outsourced CFO and The Fractional CFO Centre.