What multiple is my business worth? An Australian SME guide

First, agree on what profit means

For an established business, an earnings approach starts with a supportable level of annual earnings and applies a multiple. The arithmetic is simple. Deciding which earnings and which multiple belong together takes more work.

EBITDA means earnings before interest, tax, depreciation and amortisation. For a valuation, it may be adjusted to reflect sustainable trading and commercial operating costs. It is not cash available to an owner: equipment replacement, working capital, debt payments and tax still matter.

Seller’s discretionary earnings, or SDE, takes a different view. It generally adds back one working owner’s compensation, alongside supported adjustments, to show the benefit available to an owner-operator before financing and tax. Other necessary roles still need a market cost. The IBBA definition listed below is useful for this distinction, but its overseas pricing commentary is not an Australian benchmark.

The owner’s job still has to be done

List what you actually do in a normal week. Quoting, supervising work, winning customers and managing cash are jobs someone must perform after you leave. Business Queensland specifically warns that a profit figure can mislead buyers if it excludes a fair salary for the owner’s work.

Consider this invented example. A business has $360,000 of SDE after supported adjustments. Employing someone to perform the departing owner’s duties would cost $140,000 a year, including employment on-costs. If that is the only remaining difference between the measures, earnings after replacement management would be $220,000.

That $140,000 must be allowed for once. If the accounts already include a manager doing the whole job at a market salary, subtracting another manager would understate earnings. If two owners work in the business, adding back both salaries without retaining the cost of the necessary work would overstate them.

Ask for the earnings reconciliation before debating the multiple. It should show every adjustment and the operating role behind it.

Why an industry label is not enough

Two Sunshine Coast businesses can sell the same service and have very different prospects after a transfer. In one, a supervisor prices jobs, customers book through the business and contracts are documented. In the other, the owner holds the relationships, approves every quote and answers every technical question.

There is no automatic premium for a procedure manual. The relevant question is whether another owner can maintain the earnings. Test that with customer retention, staff capability, contract terms and evidence from periods when the owner was away.

Also examine the cash needed to keep trading. A business approaching a major equipment replacement is different from one whose plant has recently been renewed. A headline EBITDA comparison can miss that difference entirely.

Ask what is inside the comparable sale price

A comparable sale is useful only when its terms are understood. A price that includes stock and normal working capital should not be compared directly with a price quoted plus stock. An asking price is also different from a completed transaction.

For every proposed comparison, record these details. An empty field is a reason to give the evidence less weight, not permission to assume the most convenient answer.

• Completion date and whether the amount is an asking price, agreed price or settled consideration.
• Earnings measure, period and adjustments, including owner remuneration.
• Stock, equipment, property and working capital included in the transaction.
• Cash paid at completion versus earn-outs, deferred payments or vendor finance.
• Business size, revenue concentration, location and the owner’s handover obligations.

Use a sensitivity table to expose the assumptions

The table below uses invented earnings and multiples to show how two assumptions interact. These are not recommended multiples or evidence of Australian sale prices. It assumes an EBITDA-based enterprise value with operating assets and normal working capital included, before debt and surplus cash adjustments.

At the assumed 3.0 times multiple, a $40,000 disagreement about earnings changes the result by $120,000. Resolve the evidence behind the earnings as carefully as the multiple.

What to take into a valuation discussion

Bring financial statements, current management accounts, an adjustment schedule and a plain description of your role. Add the customer concentration report, lease details and expected equipment spending. Those records help explain why a broad market comparison does or does not fit.

A useful conclusion states the valuation date, earnings basis, transaction assumptions and reasons for the selected range. ATO guidance likewise stresses relevant evidence and documented assumptions for tax valuations. If the report is needed for a tax matter, lender or dispute, agree that specific purpose before commissioning the work.