What multiple is a small business worth?

Why there is no single multiple

Websites and brokers often quote a range of multiples for small businesses. Those figures can start a conversation, but they are not a valuation. A multiple only means something once you know three things: which profit figure it is applied to, what a buyer actually gets, and how likely those profits are to continue under a new owner.

Two businesses in the same industry with the same turnover can support very different multiples. One may run smoothly without its owner, with steady customers and clean records. The other may rely on the owner's personal relationships and one large client. A published average hides that difference.

What is the multiple applied to?

The same multiple gives very different answers depending on the earnings figure underneath it. Common bases include:

• Net profit before tax, as shown in the accounts.
• EBITDA: earnings before interest, tax, depreciation and amortisation.
• Owner's earnings: profit before the owner's own wage and personal expenses are taken out.

A multiple of owner's earnings cannot be compared with a multiple of profit after a market wage for the owner. Mixing the two can make an owner overestimate value. A valuer also normalises earnings, which means removing one-off items, private costs run through the business, and related-party rent or wages set above or below market rates.

Check what the number includes, too. A price for the business assets, such as goodwill and equipment, is not the same as the value of the shares in the company that owns them. The shares also carry the company's cash, debts and other liabilities.

What moves the multiple up or down

A multiple is shorthand for risk and growth. The more confident a buyer can be that earnings will continue, the higher the multiple a valuer can support. Things a valuer weighs include:

• How much the business depends on the owner's personal skills, licences or relationships.
• Whether a few customers make up a large share of revenue.
• The quality and consistency of the financial records over several years.
• Whether revenue is recurring or contracted, or has to be won again each year.
• Lease terms, key staff, supplier arrangements and changes in the industry.

Some small businesses are better valued another way, for example on net assets where profits are low or irregular. A multiple is one method among several, and the valuer chooses the approach that fits the business.

When a rule of thumb is not enough

A rough multiple may satisfy curiosity. It is not enough when real money or tax depends on the number: a sale, a buy-in or buy-out between shareholders, a restructure, or a capital gains tax calculation.

The ATO's market valuation guidance says a valuation’s acceptability usually depends on the process followed rather than who did it, and expects an objective, suitably experienced valuer, a recognised method and credible evidence. The taxpayer stays responsible for the figure, and the ATO may review it. Where individuals and trusts rely on market value for the 1 July 2027 CGT changes, the relevant date is 30 June 2027. An apportioning method may be an option once one is made, and your tax adviser decides what suits you.

Independent Business Valuation prepares independent valuations of small and medium businesses and business interests. Each report is prepared by a suitably qualified business valuer at Valuo, who works out which earnings to use, normalises them, chooses the method and explains the reasoning in writing. We charge one fixed fee of $999 + GST for a full valuation report on one business or ownership interest with annual turnover under $10 million. The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start.