How to value a small business for sale

How Much Is My Business Worth? A Small Business Valuation Guide for Australia

It is one thing to figure out what your business is actually worth... that is where things get messy. The majority of the owners over value (due to emotional attachment) or underestimate (because they simply want to sell it fast). I've seen both. One cafe owner even demanded that his small suburban set-up was worth 500k dollars due to the loyal customers. It didn't sell for months. Later became half that.

So when you are asking the question, how much is my business worth? — you are already asking the correct question. It is the art to get it right, not to guess.

Begin With Facts, Not Passion

Now, let us get this out of the way, your business is not as valuable as you think it is. It is as valuable as one wants to pay. That depends on:

• Profit
• Risk
• Growth potential
• Market demand

Not how long you've owned it. Not the amount of effort you have put in. Cruel, but fair.

The Most Common Valuation Method (And Why It Works)

Multiple profit is a common measure of value of small businesses in Australia. Basically:

Business Value = Annual Profit × Industry Multiple. The multiple varies according to the nature of business. For example:

• Small retail stores — 1.5 to 2.5x profit
• Cafes/restaurants — 1x to 2x
• Service businesses — 2x to 4x

Therefore, assuming your business has yearly sales of $100,000, then it could be worth between $150,000 and $300,000. That is where such tools as a business valuation calculator in Australia or a business worth calculator in Australia would be helpful, as they provide you with an approximate estimate. By no means ideal, but a point of departure.

Profit Matters... But Which Profit?

This is the point at which individuals become bewildered. Customers do not simply examine your tax return. They examine the so-called adjusted profit (or SDE — Seller Discretionary Earnings). This includes:

• Net profit
• Owner's salary
• Personal expenses incurred in the business
• One-off costs

Why? Since buyers are interested in knowing what they will earn upon taking over. Therefore, in case you have been charging some personal expenses to the business (as most owners do), then your business may be worth more than what it appears on paper.

Apply a Business Valuation Checklist

In case you want to be even more specific, you should not use a calculator alone. Use a proper business valuation checklist. Ask yourself:

• How stable is my revenue?
• Am I too dependent on one customer?
• Do you have any long term contracts?
• Does the site of the business matter?
• Is the business independent of me?

That last one is huge. A one-person business is less sellable — and less valuable.

Assets vs Goodwill

What is another confusion that people make: assets and goodwill.

Assets include:

• Equipment
• Inventory
• Vehicles
• Property (if included)

Goodwill includes:

• Brand reputation
• Customer base
• Location advantage
• Online presence

There are those businesses that are asset-intensive (such as manufacturing) and those that are more based on goodwill (such as cafes or salons). Both will be considered by the buyers, yet in many cases the goodwill is where the true value is to be found, provided it is good.

Market Conditions Are More Important Than You Think

You might do the right thing... and still receive a lesser price. Why? Because the market decides. For example:

• When there are other businesses of the same type flooding the market — the prices fall.
• When the demand is high — the prices rise.
• When the economy is insecure — the buyers are suspicious.

Hospitality is one of the industries in Australia that can be highly unstable, whereas the service-based type of business tends to be more stable. Then in the business valuation calculator in Australia, keep in mind that it does not make a difference in time. And timing matters a lot.

A Quick Real-Life Example

Assume that you are a small cleaning business in Perth.

• Annual profit: $80,000
• Strong repeat clients
• Minimal owner involvement

This may result in a better multiple — perhaps of 3x. Estimated value? Around $240,000. That is now compared to a cafe that is making the same profit but one that needs fulltime owner participation and a high turnover rate of staff. That might sell closer to 1.5x. Same profit but completely different value.

Where to Sell (And Why It Will Change Price)

After determining your value then the next thing is to list your business. This is a section that most people forget about and it is important. On some platforms, the commissions or success fees are high and they consume your ultimate sale price. Others will charge you a fee and allow you to keep all that you make.

As an example, sites such as Dealin will list a business, no success fee, for a flat fee of $199. That is, whatever you sell at — you keep it. It may not alter your valuation, but it certainly alters your walking away amount.

Final Thoughts

The process of valuing a small business is not a science. It consists of part numbers, part market conditions, part negotiation... and part honesty. Use calculators such as business worth calculators in Australia to have a ball-park figure. Then further down with a due business valuation checklist. Consider your profits, your risks, and the degree of reliance of the business on you.

And perhaps most of all — be realistic.

Since the best price is not the largest figure you can think of. It is the sum that one is ready to pay.