What’s Your Business Actually Worth?
By Zoran Sarabaca, Director, Xcllusive Business Sales
As featured in Western Sydney Business Access
Ask ten business owners what their business is worth and you will get ten confident answers. Ask a buyer, and you will usually get a very different number. The gap between those two figures is where most sale conversations begin, and understanding it is the difference between a smooth exit and a listing that sits on the market for a year.
So how is a business actually valued? Not by what you have put into it, and not by what you need to fund your retirement. A business is worth what a willing buyer will pay for the future profit it can reasonably be expected to produce. That one shift in thinking, from effort and need to future return, is where a realistic valuation starts.
It comes down to profit, not revenue
The most common mistake owners make is valuing their business on turnover. Revenue is vanity. A business turning over three million dollars but barely breaking even is worth far less than one turning over one million with strong, consistent margins. Buyers are purchasing profit, so profit is what gets valued.
But not the profit on your tax return. A valuation is based on what is often called normalised or adjusted earnings, the true profit a new owner would enjoy once the figures are cleaned up. That means adding back expenses that are personal to you and will not carry over to a buyer, such as an above-market owner’s salary, a vehicle run through the business, travel, or one-off costs that will not recur. It also means stripping out any income that will walk out the door when you do. The result is a clear picture of what the business genuinely earns, which is almost always different from the bottom line your accountant reports.
The multiple is where it gets interesting
Once maintainable earnings are established, a multiple is applied. A business earning two hundred thousand dollars in adjusted profit might sell for 1.5 times earnings, or it might sell for as much as 3.5 times. That range is enormous, the difference between three hundred thousand dollars and seven hundred thousand, and it is driven almost entirely by risk. The lower the perceived risk to a buyer, the higher the multiple, and the higher your sale price.
So what lifts the multiple? Recurring or contracted revenue rather than one-off sales. A spread of customers rather than reliance on one or two large accounts. Documented systems and a capable team that can run the day to day. A genuine growth story. And critically, a business that does not depend on you. If you are the business, if you hold the relationships, do the quoting and make every decision, a buyer sees risk, and risk pulls the multiple down. The most valuable businesses are the ones that can keep performing after the founder walks out the door.
Why your own number is usually wrong
Owners tend to anchor their valuation to something emotional. The years of sacrifice. The amount they need to retire comfortably. What a mate sold a similar business for down the road. None of these is how the market prices a business, and leaning on them is how good businesses end up overpriced, stale, and eventually sold for less than they were worth at the start.
There is one trap worth naming on its own. Many owners research their value by searching for similar businesses listed for sale online and noting the asking prices. It feels like sensible homework, but it rests on a flawed assumption. An asking price is exactly that, what a seller is hoping to get. It is not what the business is worth, and it is certainly not what it will sell for. Plenty of businesses get listed at four or five times earnings and are still sitting on the market a year later. Listed is not sold, and sold is not the same as value. Pricing your own business off someone else’s optimism is one of the quickest ways to end up disappointed.
The honest truth is that the market does not care what you put in. It cares what it gets out. That can be a hard message, but it is a liberating one, because nearly every value driver above is something you can actually improve before you sell.
Get a real number before you need it
The best time to find out what your business is worth is not the day you decide to sell. It is two or three years earlier. A proper appraisal does more than hand you a figure. It shows you exactly which levers to pull to lift that figure, whether that is reducing owner dependence, tightening margins, or locking in recurring revenue. Owners who get valued early, and act on the advice, routinely sell for considerably more than those who wait until they are ready to leave.
If you have never had your business professionally appraised, that is the place to start. Not a guess, not a rule of thumb from the pub, but a proper assessment of what a buyer would genuinely pay. You might be pleasantly surprised. You might get a reality check. Either way, you will finally know your real number, and you can build from there.
Zoran Sarabaca is the founder and Director of Xcllusive Business Sales, one of Australia’s leading business brokerages. Xcllusive has helped more than 900 owners sell their businesses, with a process built on accurate appraisals, vetted buyers and strict confidentiality. Initial consultations and appraisals are obligation-free. Call 1800 825 831 or visit www.xcllusive.com.au