What drives the value of a private business

Value comes down to two questions

Someone buying a private business is buying a stream of future profit. What they will pay depends on how large that stream is once the accounts are cleaned up, and how sure they can be that it keeps flowing after the current owner steps back.

Every driver works on one or both. In a capitalisation of earnings valuation, the first sets the earnings figure and the second sets the multiple applied to it. In a discounted cash flow, the second shows up in the discount rate. Both are explained on the business valuation methods page.

Earnings quality: what the profit really is

The starting point is not the profit in your tax return. It is maintainable earnings: the profit a new owner could reasonably expect to keep making, with the business run on ordinary commercial terms. That means adjusting for owner pay, one-off items, related-party rent or wages not at market rates, and personal costs run through the business.

Quality matters as much as size. A valuer checks whether profit turns into cash, whether the three to five year trend is steady, and whether the latest year is typical. A one-off spike is valued at what the business can sustain, not at its peak.

Add-backs need evidence. Undocumented ones tend to be discounted or ignored, by valuers and by buyers. Step 3 of how to value a business walks through normalisation in detail.

Margins and growth

Gross margin shows whether you have pricing power and control over direct costs. Steady margins suggest a business that can pass on cost increases. Margins that swing with input prices, or sit well below comparable businesses, signal risk, and a buyer will want to know why.

Growth adds value when it is evidenced and does not depend on spending a buyer would have to fund. Three years of rising revenue counts for more than a forecast, and a forecast that doubles the past growth rate without a documented reason carries little weight. A business already at capacity is valued with the cost of its next site or machine in mind.

Recurring revenue and customer concentration

Revenue that renews without being won again is more certain. Think of a ladder: fixed-term contracts at the top, then subscriptions and service agreements, then loyal repeat customers with no contract, then one-off projects. The higher your revenue sits, and the fewer customers you lose each year, the more a buyer can rely on it.

Concentration works the other way. There is no fixed threshold, but a valuer looks hard at any customer whose departure would turn a profit into a loss. Is there a written contract, how long does it run, can the customer walk away on a change of ownership, and how long has the relationship lasted? Reliance on one supplier raises the same questions.

Key-person dependence

In many small businesses the owner is the business: they hold the client relationships, price every job and answer the phone. A buyer cannot buy that. It is the difference between personal goodwill, which leaves with the person, and business goodwill, which stays through the name, location, systems, staff and contracts. The business goodwill valuation page explains the distinction.

Dependence can sit with a key employee too. A valuer asks who the main customers actually deal with, whether there is a second layer of management, and what happened to the numbers the last time the owner took a long break.

Systems and records

Documented processes, monthly management accounts and clean books reduce the risk that the business stumbles in new hands, and let a buyer check the numbers without months of digging.

Records that do not reconcile and accounts finalised a year late lower a buyer's confidence, which usually means a lower price, tougher terms or more of the price held back. The list of information needed for a business valuation is a useful benchmark.

Lease security

For a business tied to its site, such as a cafe, clinic or workshop, the lease can be a major risk. A valuer checks the term remaining, any options, the rent against market, and whether the lease can pass to a buyer. Eight months left and no option is worth less than a fresh lease with options. Transferring a lease usually needs the landlord's consent, so that relationship matters too.

Where the owner or a related entity owns the premises, the business is generally valued as if it paid a market rent, with the property treated as a separate asset. We value the business, not the real estate.

Working capital

Working capital is the cash tied up in stock and debtors, less what you owe suppliers. A price usually assumes a normal level comes with the business. One that needs a lot tied up turns less profit into free cash, and its value reflects that.

Obsolete stock may be worth well under book value, and slow debtors reduce what a buyer will pay. In a seasonal business, working capital on the valuation date may not be typical of the year.

Industry risk

Some risks sit outside the business: economic cycles, regulation or licensing changes, new technology and how easily a competitor could open nearby. You cannot change your industry, but you can show how your business handled a downturn or a new competitor. Evidence that it held up counts for more than an assurance that it would.

Same profit, different value

What an owner can improve, and how long it takes

Most drivers can be improved, but a change only counts once it shows up in the records and holds for a while, often a full financial year.

1. 01In the next three monthsBring the books up to date. Separate personal costs. Put related-party rent and wages on market terms. List each add-back you would claim, with evidence.
2. 02Within a yearPut key customers on written agreements. Start monthly management accounts. Document how the core work gets done. Clear old stock and chase slow debtors. Extend a short lease.
3. 03Over two to three yearsBuild a management layer so the business runs without you. Shift revenue towards contracts. Reduce reliance on your largest customer. Build a record of steady margins.

The drivers at 30 June 2027

Under the 1 July 2027 CGT changes, individuals and trusts holding CGT assets at the end of 30 June 2027 are generally treated as if they sold and reacquired them at market value just before 1 July 2027. Where a valuation is used to work out that amount, it is prepared as at 30 June 2027, on the drivers as they stood that day. 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.

A valuation is one option, not the only one. Once it is finalised, some individuals and trusts may be able to choose a government apportioning method (still a draft) instead, companies are treated differently, and your tax adviser decides which approach suits you. See the 1 July 2027 CGT changes for business owners.

Getting a valuation

Independent Business Valuation values businesses and business ownership interests Australia-wide. A full valuation report sets out the earnings relied on, the risks weighed, the method and the key assumptions, so you can see which drivers are holding the value back. We do not give tax advice.

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. Delivery is 2 business days for turnover under $2 million and 3 business days for turnover $2 million to $10 million. Delivery time starts once payment and all required information have been received, and pauses while we wait for answers to our questions or your signed representation letter. 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. Turnover over $10 million, groups and disputes are quoted in writing.