Which valuation method fits your business

Three approaches, a handful of methods

Methods fall into three broad approaches. The income approach values a business by the earnings or cash it should produce. The market approach looks at prices paid for similar businesses or shares. The asset approach looks at what the business owns, less what it owes. A one-table summary sits on our guide to business valuation in Australia.

For most trading businesses the income approach leads, because a buyer is paying for future profit. Good practice is to choose one primary method and test it with at least one other. The ATO's guidance on market valuation for tax purposes recommends a cross-check method where possible, and expects the report to explain why the primary method was chosen.

Capitalisation of future maintainable earnings

This is the workhorse method for established, profitable private businesses, often called an earnings multiple. Work out the profit the business can keep making under a new owner, then apply a multiple that reflects how risky and durable that profit is.

Normalise the earnings

Private accounts are prepared for tax, not for a buyer, so the valuer restates them on a commercial footing:

• Owners' pay: replace what the owners draw with what it would cost to employ someone to do their jobs.
• One-off items: remove a legal dispute, a flood repair or a contract that will not repeat.
• Related-party costs: reset rent paid to a family trust, or wages paid to a relative, to market rates.
• Personal expenses run through the business: add them back, where the records show them.

Maintainable profit is a judgement, not an average. Three years of steady growth may support using the latest year. A spike driven by one customer may not.

Match the measure to the business

EBITDA (earnings before interest, tax, depreciation and amortisation) ignores how the business is financed, but it also ignores the cost of replacing equipment. For a business that keeps buying trucks, machines or fit-outs, EBIT, or EBITDA less realistic maintenance spending, usually gives a truer picture. The multiple must match the measure.

Choose the multiple

The multiple is the flip side of the return a buyer would demand: riskier earnings, lower multiple. Owner reliance, a few large customers, a short lease and poor records push it down. A capable team, recurring revenue, a wide customer spread and systems that run without the owner support it. Independent Business Valuation does not publish industry multiples, because a figure lifted from a table without those adjustments proves nothing.

Get from the business to the shares

The multiple gives the value of the operating business, often called enterprise value. To reach the value of the shares, the valuer generally deducts debt, adds surplus cash or assets the business does not need, and checks working capital is at a normal level. Owner estimates often skip this step.

Discounted cash flow

A discounted cash flow (DCF) valuation forecasts cash flows year by year, usually for five years or more, adds a terminal value for the years beyond, and discounts everything back to the valuation date at a rate that reflects the risk. It suits businesses where one year of profit does not represent the future: fast growth, recovery from a disrupted year, a contract or licence with a known end date, or large uneven capital spending ahead.

Its weakness is sensitivity. Small changes to growth, margins or the discount rate move the answer a long way, and the terminal value is often most of the total. Without dependable forecasts, a DCF can look precise while resting on guesswork, so a careful valuer shows how the result moves with the key inputs and checks the multiple it implies.

For a valuation at a past date, the forecasts should be ones that could reasonably have been made at that date. What actually happened later is generally kept out.

Net assets and net tangible assets

The net assets method adds up what the business owns at market value and deducts everything it owes. Net tangible assets (NTA) leaves out goodwill and other intangibles.

Book values are historical. Equipment may be written off but still productive, debtors may never pay and stock may be slow-moving. Goodwill the business built itself generally is not in the accounts at all. Each line is restated to market value. We value businesses, not real property, so where a business owns land or buildings we use a qualified property valuer's figure as an input.

Net assets usually leads for holding and investment entities, for businesses whose profits are too low to give a fair return on their assets, and for businesses being wound up, valued on what the assets would bring in an orderly sale less the costs. For a profitable business, NTA is a useful floor: an earnings value below it needs explaining.

Excess earnings: separating goodwill

Sometimes the question is how much of the value is goodwill: when goodwill is transferred on its own, when a practice is restructured, or when a sale price is split between goodwill, plant and stock. The excess earnings method answers it.

1. 01Start with normalised earningsMaintainable profit, after a market salary for every working owner.
2. 02Charge for the assetsDeduct a fair return on the net tangible assets the business needs to trade.
3. 03Capitalise the restWhat remains is earned by the name, customers, systems and team. Capitalised at a rate that reflects its risk, that is goodwill.
4. 04ReconcileGoodwill plus net tangible assets should agree with the primary valuation. If not, an input is wrong.

In professional practices it also matters whose goodwill it is. Earnings that rest on one principal's personal relationships may not transfer to a buyer. Business goodwill valuation goes further. How a sale price is split between goodwill and other assets may have tax and duty consequences, so ask your tax adviser to review the allocation before signing.

Industry rules of thumb, and their limits

Many industries have a shorthand for value, such as a multiple of recurring fees for an accounting practice or of a rent roll's annual income. They show quickly whether a valuation sits in a believable range. As a primary method they fail for reasons that are easy to miss:

• They ignore profit. Two practices with the same fees can have very different margins, and a buyer pays for the margin.
• They hide assumptions, such as whether stock, plant or a vendor handover period is included.
• They are often built on asking prices or anecdote, not verified sales, and they date quietly.
• They ignore the risks particular to your business, such as one large customer or one key employee.

Where a reliable rule of thumb exists, we use it as a cross-check, and if the result sits well away from it the report says why. A figure from a rule of thumb alone is an estimate, not a valuation.

Cross-checks: testing the answer

A cross-check is any independent view that would expose a mistake in the primary method:

• Implied multiple: a DCF result divided by maintainable EBITDA should make sense for the risk.
• Implied goodwill: large goodwill in a business that depends entirely on its owner usually means the multiple is too high.
• Dealings in the business itself: a recent arm's length share sale, buy-in or genuine offer, adjusted for timing and terms.
• Affordability: whether a buyer could fund the price from the business's cash flow on normal lending terms.
• Net tangible assets, comparable sales and rules of thumb.

When methods disagree, the answer is not to average them. The valuer works out why they differ, relies on the method the evidence supports best, and shows that reasoning in the report.

The methods side by side

How we choose the method for your valuation

Method follows facts: what is being valued (the whole business, all the shares, a minority parcel, trust units or goodwill only), the profit history, how asset-heavy the business is, what evidence exists and the purpose. A 25% shareholding is not simply a quarter of the company's value; see valuing a minority interest in a private company (/resources/minority-interests-and-discounts/).

The report states the method, why it suits, the key adjustments and the cross-checks, so your accountant, a co-owner or a buyer can follow the reasoning. How to value a business walks through the whole process.

Valuations as at 30 June 2027

The 1 July 2027 CGT changes do not change the methods. The valuation reflects what was known or reasonably foreseeable at 30 June 2027. A valuation as at 30 June 2027 is prepared after that date, once your records to 30 June 2027 are available. You can book your place now. Whether you need a valuation at all, or may be able to choose the apportionment method the Government is preparing (still a draft in October 2026), is a question for your tax adviser. The main transitional rule applies to assets held by Australian resident individuals and trusts with at least one eligible beneficiary, not to a company's own assets. A separate rule resets pre-CGT assets (acquired before 20 September 1985), which can include assets a company holds.

Getting a valuation

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. Groups, several interests and businesses with turnover over $10 million: Quoted in writing. 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. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises.

Every report is prepared by a suitably qualified business valuer at Valuation Group, who chooses the method, makes the judgements and explains both.