Small Business Valuations in Australia: Key Methods, Industry Multiples, and Rules of Thumb

By Jaye Mankelow

In our recent discussions on pricing, budgeting, and assessing the overall value of a business, a common question for Australian small business owners is: how much is my business worth? This guide introduces the essential valuation methods, industry-specific EBITDA multiples, and practical rules of thumb to help you gain a clear picture of your business’s value.

Why Business Valuation Matters for Small Businesses

Understanding how much your business is worth isn’t just about preparing for a sale. Regular valuations provide insights for strategic planning and financial growth. Key benefits include:

• Planning for Growth: A valuation sets a benchmark for assessing growth, guiding future investments and developing financial strategies.
• Succession and Exit Strategy: Knowing your business’s worth helps facilitate smooth ownership transitions, whether for retirement, succession, or sale.
• Informed Decision-Making: A clear valuation enables business owners to make effective choices about budgeting, hiring, and expansion.

Primary Valuation Methods for Australian Small Businesses

Different valuation methods suit different types of businesses. Here are the most relevant methods for small businesses in Australia:

a. Capitalisation of Future Maintainable Earnings (CFME)

The CFME approach is ideal for established businesses with consistent earnings, such as those in retail, trades, or consulting. It estimates business value based on sustainable earnings by applying a capitalisation rate, which reflects risk and expected return.

• Calculate Maintainable Earnings: Normalise earnings by adjusting for unusual expenses or one-off revenues to represent ongoing operational performance.
• Apply a Capitalisation Rate: Rates typically range from 1 to 6 for small businesses, depending on industry risk, market conditions, and the business’s stability.

CFME is a reliable method for businesses with predictable revenue streams, offering a straightforward valuation based on sustainable earnings.

b. Discounted Cash Flow (DCF)

The DCF method is particularly suited to businesses with strong growth potential. It calculates value by determining the present worth of expected future cash flows.

• Forecast Future Cash Flows: Project expected cash flow over a set period (typically five to ten years) based on market conditions and business growth.
• Calculate the Terminal Value: Estimate the business’s residual value beyond the forecast period.
• Discount Cash Flows to Present Value: Apply a discount rate to account for risk and the time value of money.

DCF provides an in-depth, future-oriented view of business value, ideal for companies with consistent growth potential.

c. Net Asset Backing

For asset-heavy businesses, such as those in manufacturing or agriculture, Net Asset Backing is a practical approach. This method values the business based on the net worth of its tangible assets, subtracting any liabilities.

• Assess Asset Value: Calculate the current market value of physical assets like property, equipment, and inventory, adjusting for depreciation.
• Subtract Liabilities: Deduct outstanding liabilities to determine net worth.

This method is well-suited for businesses where assets are a key part of value, though it may underestimate companies with strong brand loyalty or intellectual property.

Industry Multiples by Sector

Industry-specific EBITDA multiples provide a benchmark for valuation, tailored to the nature of each sector. Here’s a revised guide to EBITDA multiples that reflects common Australian SME practices:

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These EBITDA multiples represent the range typically observed for small businesses in Australia. Applying these ranges to your business’s EBITDA can give a preliminary estimate of how much your business is worth when combined with other valuation approaches.

Industry Rules of Thumb for Quick Valuations

Industry rules of thumb provide an accessible and practical way to estimate business value by applying standardised multipliers to common business metrics. Here are the core principles of each rule:

• Revenue Multiples (1–3 Times Annual Revenue): This approach values the business based on a multiple of its total annual revenue, commonly used in retail and service industries where revenue stability is a primary indicator of performance.
• Earnings Multiples (2–6 Times EBITDA): Using EBITDA as a baseline, this multiplier reflects the operational earnings of the business, which is essential for valuing professional services and other service-based businesses.
• Owner Earnings Multiples (1–2 Times Owner’s Earnings): Relevant for owner-operated businesses, this approach considers the owner’s compensation, discretionary expenses, and other personal financial benefits associated with the business. It provides an estimate that reflects the true financial benefit to the owner.

These rules of thumb are best used as initial estimates and are typically paired with a more detailed method, like CFME or DCF, for a comprehensive valuation.

Choosing the Right Approach for Your Business

Selecting a valuation approach depends on your business model, assets, and goals:

• For Consistent Income: CFME works well for businesses with steady, predictable revenue and profitability, such as small retail, trade, and service-based businesses.
• For Growth-Oriented Businesses: DCF is suitable for businesses with robust cash flow projections, including technology, consulting, and professional services.
• For Asset-Rich Businesses: Asset backing provides a fair estimate for businesses with significant physical assets, such as manufacturing, agriculture, or construction.

Using a combination of methods often provides the most reliable valuation by giving a balanced perspective. Consulting with a valuation expert familiar with Australian small businesses can help determine the most appropriate approach, giving you a well-rounded picture of how much your business is worth.

Understanding the value of your business is essential for growth planning, succession, and confident decision-making. By applying valuation methods like CFME, DCF, and Net Asset Backing, alongside updated sector-specific EBITDA multiples and industry rules of thumb, Australian small businesses can obtain a realistic estimate of their worth.

Aspira offers tailored valuation services, helping small business owners navigate these methods and providing both quick assessments and comprehensive valuations.

Knowing how much your business is worth enables you to make informed choices and set a successful path for the future.

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