What Is My Business Worth? How Business Valuations Work in Victoria

"What's my business worth?" is the first question almost every owner asks us. It's often asked either years too late or weeks too early. Too late, because the things that lift a sale price take time to put in place. Too early, because a number borrowed from a friend's sale or an online calculator usually has little to do with what a buyer will actually pay.

For most small and medium businesses in Victoria, value comes down to a handful of things a buyer can check: what the business really earns, how that compares with similar businesses, how secure its premises are, and how well it runs without you. Here's how each of those works in practice.

Start With What the Business Really Earns

Buyers don't pay for turnover. They pay for the profit they'll take home as the new owner. For owner-operated businesses, brokers usually measure this as adjusted net profit, often called PEBITDA: profit before interest, tax, depreciation and amortisation, with one working owner's wage added back.

Getting to that figure means "normalising" your accounts:

• Add back one-off costs, such as an unusual repair or legal fees from a dispute that's now settled.
• Add back personal expenses run through the business, like a private vehicle or family phone plans. Only add-backs you can document will survive a buyer's accountant.
• Adjust wages that aren't at market rate. If a family member works unpaid, a new owner will have to pay someone to do that job, and the profit falls accordingly.
• Use the rent the lease actually requires going forward, not what you paid three years ago.

An honest version of this figure is the foundation of everything else. An inflated one doesn't raise your price. It simply falls apart in due diligence, usually after weeks of wasted time.

Apply a Multiple That Matches the Market

Adjusted profit is then multiplied by a figure that reflects how buyers price that type of business. A café, a trades business, a manufacturer and a professional services firm will each attract a different multiple, because buyers see different levels of risk, effort and transferability in each.

Rather than guessing, experienced brokers draw on industry pricing data and comparable businesses on the market to settle on a realistic range. Where your business lands within that range depends on the factors below, which is why two businesses making the same profit can sell for noticeably different prices.

The Lease Can Make or Break the Price

For any business that trades from premises, the lease is part of what the buyer is purchasing. A profitable restaurant with eight months left on its lease and no option to renew is worth far less than the same restaurant with a long term secured, because the buyer can't be sure the income will still be there in two years.

Buyers, and their lenders, will look closely at:

• The remaining term, plus any options to renew
• The current rent and how it is reviewed
• Whether the rent is sustainable relative to turnover
• Whether the landlord will consent to assigning the lease to a new owner

If your lease is short, speak to your landlord before you go to market, not in the middle of negotiations.

How Much Does the Business Depend on You?

A business that only works because the owner is there every day is closer to a job, and buyers price it that way. The more the business runs on systems, trained staff and documented processes, the easier it is for someone new to step in, and the more a buyer will pay.

A few useful questions to ask yourself:

• Could a manager run the business for a month without calling you?
• Are key supplier and customer relationships held by the business, or by you personally?
• Is revenue spread across many customers, or does one client account for a large share?

Know What's Included in the Price

Owners are often surprised by what an asking price covers. In most small business sales, the price includes the goodwill and the plant and equipment needed to trade. Stock is usually treated separately: it's counted at settlement and paid for on top of the agreed price. Being clear about this from the start avoids awkward conversations later.

How to Lift Your Business's Value Before You Sell

Most of what raises value takes months rather than days, so it pays to start 12 to 24 months before you plan to sell:

• Tidy your financials. Have clean, accountant-prepared figures for at least the last two to three financial years, with personal expenses clearly separated.
• Secure the lease. Negotiate an extension or option well ahead of any sale.
• Reduce reliance on yourself. Train a second-in-charge and write down how things are done.
• Spread your revenue. Lower your dependence on any single customer or supplier.
• Keep trading steady. Buyers pay for consistent results, and a dip in the final year before a sale can pull the price down.

Get an Appraisal Before You Set a Price

An online calculator can't see your lease, your staff or your customer base. A proper appraisal considers all of it and gives you a realistic price range, along with the factors pushing your value up or down.

At Vic Brokers, our business brokers appraise Victorian businesses using industry pricing data and comparable businesses currently on the market. It's confidential, and it gives you a clear starting point whether you plan to sell next month or in a few years.

Request your free, confidential business appraisal or learn more about selling your business with Vic Brokers.