When you run your own business, there comes a time when you want to know what it is worth. Two common reasons are to obtain commercial finance to fund business growth, or when you are considering selling the business.
There are several ways to value a Small to Medium Enterprise (SME) so let's dive in.
The Australian Taxation Office (ATO) defines a small business as having an aggregated annual turnover of less than $10 million and fewer than 20 employees.
According to data produced by the Australian Small Business and Family Enterprise Ombudsman in 2024, there are over 2.6 million actively trading businesses in Australia. 91.6% of these have a turnover of less than $2 million. 6.5% earn between $2 - $10 million, while 1.9% have a turnover above 10 million.
Over 97% of these employ less than 20 people.
Breaking this down, 64% of Australian businesses are self-employed/non-employing, 25% employee 1-4 people and 9% employ 5-19 people.
The point of this data is that most SME businesses would not run without the active involvement of the owner. The first test of your operating model is whether the business could operate without the owner for a sustained period of time. If not, then this model is more of a self-employment situation rather than a business, even if it does have staff.
Many business people are happy being self-employed, while others will try to make the migration and grow the business so that it can operate without the day-to-day reliance upon the active involvement of the owner.
There are a multitude of approaches and complexities that can go into establishing the value of a business. Two of the fundamental methods are:
Multiple of Recurring Income
Also known as 'Percentage of Revenue', this is a simple valuation method that is applied in many scenarios where the real value is in a customer base and the income it generates. We can then apply comparable sales or cash flow modelling to determine what multiple is applied to the Revenue.
This method is often applied where a client base is seen as highly portable and can be readily transferred to an existing business model.
Multiple of Adjusted Earnings Before Interest & Taxes (EBIT)
EBIT is another common methodology for valuing an established trading business. The adjusted EBIT is multiplied to give it a value. Calculating the ‘multiple’ is often tricky, and can be industry-specific or based on business size.
The first step is in “Normalising” the Earnings (the E of EBIT). Earnings must be adjusted to allow for items that could be:
a. Particular to the current owner of the business, such as personal expenses of the owner that might be included in the P&L.
b. Recognising the owner’s role in the business and allowing for a market salary to account for the actual time spent in the Business by the owner.
c. Non-recurring costs or revenue that were once-off or not continuing.
These assumptions are often missed in many valuations, which will result in a skewed over-valuation. For smaller businesses in particular, owners often are not properly compensated and costed for their time spent performing a functional role in the business.
Let's consider an example of a trading business:
| 2025 ($) | 2024 ($) | 2023 ($) | |
| Revenue | 208.4 | 187.9 | 165.0 |
| Gross Profit | 83.4 | 75.1 | 66.0 |
| Expenses | 63.6 | 56.3 | 49.5 |
| Earnings before Interest & Tax | 19.8 | 18.8 | 16.5 |
| Adjustments | |||
| Non-Recurring Income | (2.5) | 0 | (2.0) |
| Adjusted Salary (Owners) | (0.2) | (0.1) | (0.1) |
| Owner Personal Expenses | 0.5 | 0.7 | 0.5 |
| Management Fees | 0.5 | 0.5 | 0.5 |
| Adjusted EBIT | 18.1 | 19.9 | 15.4 |
In this example, the difference between the nominal and adjusted EBIT is not substantial, though there are some potentially adverse trends emerging that would alarm a potential purchaser.
The patterns and consistencies that emerge through different financial years will provide timely insights to a potential purchaser. So make sure that you are aware of these and can provide answers when questioned.
Once earnings are normalised, a Multiple can be applied. Generally, multiples are between 2 - 6, or sometimes 6 - 8, for specific industries such as specialised healthcare and e-commerce.
Generally, in a small business, the multiple used is significantly lower than in larger or publicly listed companies. This is because the reliability or consistency of the Earnings is not as rigorous as a larger business, and typically more reliant on the ongoing contribution of the owner.
The multiple is reflective of the risk around the volatility or certainty of the Earnings moving into the future. The greater the risk, the greater the desired return, which is reflected in a lower multiple being applied. This part takes some experience and, at times, industry expertise, so you may need some accounting advice here.
The multiple is applied to the Adjusted Earnings. So, applying a multiple of say 5 times as opposed to 3 times could mean thousands or millions of dollars at exit.
We often encounter scenarios where businesses are focused on being "sale-ready" when the current owner is right at the end of their tenure. Ideally, a business should always be ready for sale so the owner can extract the value out of it both along the way and at exit. In other words, the multiple should always be known as part of effective succession planning.
Many business owners also talk of their "Goodwill Value". Goodwill is a premium in valuation commanded beyond Net Assets. Goodwill represents the features of a business that are not usually on a balance sheet (ignoring internally generated goodwill), and are the result of a positive reputation, quality of customer relationships and business history, which can be difficult to quantify.
Learn more about business valuation in our Buying A Business In Australia Guide.