How to value your business in Australia

1. Start with the right profit figure

Buyers price a small business on the profit it makes for the person who owns it, not the net profit on your tax return. Accountants call it owner's earnings or seller's discretionary earnings; on Change Hands it is 'profit with the owner working'.

• Begin with the net profit from your accountant's profit and loss statement.
• Add back your own wage or drawings, and any family wages above a market rate.
• Add back personal expenses that ran through the business (car, phone, travel, insurance) and genuine one-off costs such as a legal dispute, a major repair or a fit-out.
• Add back interest, depreciation and amortisation, because a buyer's financing and tax position will be different from yours.
• Do this for each of the last three years. The latest full year carries the most weight; the earlier years show the trend.
• Be honest with add-backs. Buyers and their accountants check every one, and an inflated figure costs you credibility at exactly the moment you need it.

2. Work out profit under management as well

Many buyers won't work in the business themselves. They judge it on what is left after paying someone to do your job: 'profit under management'. Take profit with the owner working and subtract the full cost, including superannuation and on-costs, of a manager or the staff needed to replace you.

The gap between the two figures tells a buyer how much of the profit is really the owner's wage. A business that still earns well under management is worth more than one that only pays its owner for a 60-hour week. Change Hands shows both figures on your listing, and can suggest a replacement-labour cost from your hours and industry if you don't have one.

3. The multiple: price = profit × a number

• The most common method: multiply profit with the owner working by a multiple. The multiple reflects how risky and how transferable the business is.
• As a broad guide, many small owner-operated businesses in Australia change hands at somewhere between one and a half and three times profit with the owner working. A business that runs under management, with staff, systems and a steady three-year record, can attract a higher multiple on its profit under management. A business that depends heavily on its owner, or whose profit is falling, sits at the low end or below it.
• Industries have their own habits, so look at what comparable businesses in your field are asking and, more usefully, what they actually sold for. Asking prices on listing sites tend to run above sale prices.
• Every live listing on Change Hands shows the asking price divided by profit, for both profit figures, so buyers compare businesses like for like. Work yours out before you list so you are not surprised by what they see.

4. Check it the way a buyer does: return on price

Turn the multiple around. Profit divided by price gives the return a buyer earns on their money each year. A price of two and a half times profit is a 40% annual return; four times profit is 25%.

A buyer compares that return with what they would earn working for someone else, with a term deposit, and with the risk that the profit falls after you leave. If the return on your price, after paying a manager, is not clearly better than a wage plus a safe investment, the price is too high for anyone except an owner-operator who wants your job.

5. What pushes the value up

• Profit that is steady or growing over three years, with clean, accountant-prepared figures.
• The business runs without you: staff in place, documented systems, a manager or a short handover.
• A long lease with options to renew, or premises you can assign without drama.
• Many customers rather than one or two big ones; repeat or contracted revenue.
• Licences, permits and contracts that transfer to a new owner.
• A clear reason for selling, and a realistic handover offer.

6. What pushes it down

• Profit that depends on your personal relationships, skills or hours.
• Falling revenue or profit, or a single bad year with no explanation.
• One customer or supplier that accounts for a large share of the business.
• A lease with less than three years to run and no options.
• Cash takings that don't appear in the books. Buyers can only pay for profit they can see.
• An industry in decline, a new competitor nearby, or equipment that needs replacing soon.

7. Assets, stock and property

• Plant, equipment, vehicles and fit-out are normally included in the asking price at a fair market value, not the written-down value in your accounts.
• Stock is usually sold on top of the asking price, counted and valued at settlement. Change Hands lets you show an estimated stock value separately so buyers aren't surprised.
• Freehold property is valued and sold separately from the business, even if the same buyer takes both.
• If the business makes little or no profit, a buyer will value it on its assets, perhaps with something for goodwill, or on what it would cost to set up the same business from scratch. A profit multiple won't help you here.

8. New or very small businesses

A business trading for less than a year has no profit history to multiply. Price it on the fit-out, equipment and stock, the work already done (licences, website, early customers) and the cost a buyer would face starting from nothing. Be straight that the figures are to date, not a full year; Change Hands marks these listings as new businesses so buyers read them that way.

9. Set the asking price

• Price realistically. Buyers filter by price and skip listings that look expensive, and a listing that sits unsold for months loses its appeal.
• A clear price gets more enquiries than 'price on application'. Use POA only if you have a reason to keep the number private.
• Leave a little room to negotiate, but not so much that serious buyers don't make contact at all.
• Explain any dip or spike in profit in the notes on your figures. An unexplained drop costs you more than the drop itself.
• If the business is large, has significant assets or property, or you are dividing the proceeds with partners or family, get an independent valuation from an accountant or a registered business valuer. It costs money and usually pays for itself in the negotiation.

Get professional advice

Your accountant should check your add-backs and the profit figures before buyers see them, and advise on the tax on the sale, which can change what price you need. Change Hands does not value businesses: the ranges above are general observations, not a valuation of yours.

Useful resources

• business.gov.au: Value your business: the Australian Government's overview of valuation methods
• business.gov.au: Sell your business: the steps for selling
• ATO: Small business CGT concessions: tax concessions that can change your net result
• CPA Australia: Find a CPA: find a qualified accountant