How Buyers Value a Small Business in Australia (EBIT Multiples Explained)
If you are thinking about selling, the first question is usually “what is my business worth?” The honest answer is that it is worth what a buyer will pay, and buyers in Australia follow a fairly consistent method to get there. This guide explains how to value a business the way brokers and buyers do: what earnings they count, what they add back, how an EBIT multiple works, and why two businesses with the same profit can sell on very different terms.
It is not a valuation, and it will not give you a number. For that you need a broker, accountant or qualified valuer who knows your industry. What it will give you is a clear picture of the method, so you can see which parts of the outcome you can still influence before you sell.
Key takeaways
- Most small and medium businesses in Australia are valued on earnings: maintainable profit multiplied by a figure that reflects risk.
- The profit a buyer uses is adjusted. Your own wage, one-off costs and personal expenses are added back or replaced with a market rate.
- The multiple is a judgement about risk. The safer the earnings look to a buyer, the more confident they are paying for them.
- Operational risk shows up in the deal terms as much as the price: earn-outs, longer handovers and fewer interested buyers.
- Online calculators give a rough range at best. Get a proper valuation from a broker, accountant or valuer.
How to value a business: the method buyers use
There is no single official method. The Australian Government’s business.gov.au guide lists several, including market comparisons, return on investment, asset value, the cost to start from scratch and future profit, and notes that you can combine them (business.gov.au, Value your business).
In practice, for a profitable owner-run business, most buyers and brokers start with earnings. The core formula looks like this:
Value = maintainable earnings x multiple (plus or minus adjustments for stock, equipment and working capital, depending on how the deal is structured).
Each part of that formula carries judgement. The rest of this guide takes them one at a time.
Common business valuation methods compared
| Method | How it works | When it is used |
|---|---|---|
| Earnings multiple (EBIT or EBITDA) | Adjusted profit multiplied by a figure that reflects risk and growth | Most profitable small and medium businesses |
| Asset based | Assets minus liabilities, sometimes at market or liquidation value | Asset heavy businesses, or ones with low or no profit |
| Market comparison | What similar businesses have recently sold for | Industries with plenty of comparable sales, such as some franchises |
| Discounted cash flow | Future cash flows brought back to today’s value at a rate that reflects risk | Larger businesses with reliable forecasts |
| Entry cost | What it would cost to build the same business from scratch | A sense check, rarely the main method |
Step 1: work out maintainable earnings
Buyers do not pay for last year’s profit. They pay for the profit they believe the business will keep making after you have gone. Brokers call this maintainable (or sustainable) earnings, and it usually starts with the last two to three years of accounts.
Normalise the profit
Your accountant’s profit figure is rarely the one a buyer uses. It gets adjusted, or “normalised”, to show what the business would earn under a new owner. Typical adjustments include:
- One-off items. A legal dispute, a big repair or a one-time windfall gets removed so it does not distort the picture.
- Personal expenses. Costs run through the business that a new owner would not carry, such as a family car or personal travel, are added back.
- Non-arm’s length costs. Rent paid to a related party, or family members paid above or below market, get adjusted to market rates.
The owner’s wage add-back
This is the adjustment owners most often get wrong. If you pay yourself an unusual amount, or nothing at all, the buyer will replace your wage with what it would cost to employ someone to do your job. If you work 60 hours a week across sales, operations and finance, that might mean more than one person, and the replacement cost comes off the earnings.
This is where owner dependency first shows up in the numbers. The more roles you personally fill, the higher the cost of replacing you, and the lower the maintainable earnings a buyer will accept.
EBIT, EBITDA or SDE?
You will see a few earnings measures used:
- EBIT is earnings before interest and tax. It strips out how the business is financed and taxed so buyers can compare businesses fairly.
- EBITDA also adds back depreciation and amortisation. It is more common for larger businesses.
- Owner’s earnings (sometimes called seller’s discretionary earnings) keeps the owner’s wage in, and is used for small owner-operated businesses where the buyer will work in the business themselves.
The measure matters because the multiple only makes sense against the earnings figure it was built for. A multiple quoted on EBITDA cannot be applied to owner’s earnings. Ask your broker which one they are using.
Step 2: apply EBIT multiples
The multiple is the number of years of maintainable earnings a buyer is willing to pay up front. A lower multiple means the buyer sees more risk, or wants a faster return on their money. A higher one means they are more confident the earnings will hold and grow.
Here is an illustrative example (the figures are made up to show the arithmetic, not a guide to your business):
| Item | Amount |
|---|---|
| Reported net profit | $300,000 |
| Add back: personal expenses and one-off legal cost | + $40,000 |
| Add back: owner’s current salary | + $80,000 |
| Less: market cost to replace the owner’s roles | – $160,000 |
| Maintainable EBIT | $260,000 |
| Value at a multiple of 2.5 | $650,000 |
| Value at a multiple of 3.5 | $910,000 |
Same business, same profit, and a gap of $260,000 that comes down to how much risk the buyer sees. That is why the multiple gets so much attention.
What is a typical multiple?
Be careful with any number you read online. Xero’s guide says small business profit multipliers typically range from two to five times annual profit (Xero, How to value a business), but the real figure depends on your industry, size, earnings measure, growth and the current market. A broker who has sold businesses like yours recently is the only reliable source for your sector.
What moves the multiple: risk
The multiple is where the operational side of your business gets priced. A buyer is asking one question: how confident am I that these earnings survive the change of owner? Industry, size and growth all matter. So do the things below, and unlike your industry, you can change them.
| Risk factor | What raises buyer concern | What builds buyer confidence |
|---|---|---|
| Owner dependency | Sales, decisions and key customers all route through you | The business runs for weeks without you and the numbers hold |
| Key people | One or two staff hold knowledge nobody else has | Knowledge is documented, and roles have backup |
| Customer concentration | A few customers make up a large share of revenue | Revenue spread across many customers, with relationships held by the business |
| Recurring revenue | Every month starts from zero | Contracts, retainers, service agreements or repeat work |
| Documentation | Processes live in people’s heads | SOPs that staff actually use |
| Visible reporting | Numbers only exist when you build them | A dashboard showing sales, cash, pipeline and jobs without asking anyone |
| Transferability | Accounts, domains, software and contracts in your personal name | Everything held by the business, with a register of who owns what |
How risk shows up in the deal, not just the price
Owners tend to focus on the headline figure. Buyers manage risk through the terms as well:
- Earn-outs. Part of the price is paid later, only if the business hits targets after settlement. The more the earnings depend on you, the more of the price may sit here.
- Longer handovers. You may be asked to stay six, twelve or more months to transfer relationships and knowledge.
- Retention conditions. Settlement may depend on key staff or customers staying.
- Fewer buyers. A business that only works with a hands-on operator narrows the pool to people who want that job.
Two businesses on the same multiple can leave owners in very different positions once these terms are counted. Our guide to key person risk when selling a business covers this in more detail.
Can I use a business valuation calculator?
Plenty of people searching for how to value a business want a calculator, and there are many online. They can be useful for a rough starting point. Know their limits:
- They rely on the profit figure you enter, usually before any normalisation or owner’s wage adjustment.
- They apply a general multiple that may not reflect your industry or current market.
- They cannot see the operational risks above, which is where a lot of the difference between similar businesses sits.
Treat a calculator result as a conversation starter for your broker or accountant, not a number to plan your retirement around.
The free Saleability Score is not a valuation calculator either, and it will not give you a dollar figure. It does something calculators cannot: in about four minutes it scores the operational side buyers test, across owner dependency, systems and SOPs, automation, management visibility, key people and transferability. Those are the factors that sit behind buyer confidence and deal terms.
What you can do before you get a valuation
Your accountant and broker will handle the financial side. Before they do, the operational work is yours, and it takes time to show up in how the business runs:
- Clean up the financials. Separate personal and business costs and keep reporting consistent month to month so the normalisation is simple.
- Find out where the business depends on you. Track every question, approval and customer that needs you for two weeks. Our step by step guide to reducing owner dependency shows what to do with the list.
- Document the processes that would break first if you or a key person disappeared.
- Move relationships and accounts into the business. Second contacts on key customers, conversations in the CRM, software and domains in the business’s name.
- Make the numbers visible. A weekly dashboard that updates without you is evidence a buyer can see.
For the full timeline, see how to prepare your business for sale: a 24-month plan.
FAQ
How much is my business worth?
Only a proper valuation can tell you. For most profitable small businesses it starts with maintainable earnings after adjustments, multiplied by a figure that reflects risk, industry and market conditions. Get a broker, accountant or valuer with experience in your sector to do it.
What is an EBIT multiple?
It is the number you multiply earnings before interest and tax by to arrive at a value. It reflects how risky and how durable a buyer thinks the earnings are. Multiples vary widely by industry, size and buyer type, so ask your broker what applies to businesses like yours.
How are businesses valued in Australia?
Most owner-run businesses are valued on adjusted earnings, with asset values, comparable sales and other methods used as cross-checks. Stock, equipment and working capital may be treated separately depending on the deal structure.
Does owner dependency reduce the value of a business?
It increases the risk a buyer sees. That can mean a higher replacement cost for your roles, fewer interested buyers, more of the price paid as an earn-out, or a longer handover. Your broker can tell you how it plays out in your sector.
Is a business valuation calculator accurate?
It gives a rough range at best. Calculators cannot normalise your earnings properly or see operational risks like key people, customer concentration or missing documentation, which often explain why similar businesses sell on different terms.
Conclusion
Knowing how to value a business takes some of the mystery out of selling. Buyers start with earnings they believe will last, take out what only exists because of you, and then decide how much risk they are taking on. The financial side belongs with your accountant and broker. The operational side, how much the business depends on you and a few key people, is what you can work on now.
If you plan to sell in the next 6 to 24 months, find out how the business looks to a buyer. Take the free Saleability Score, or see how the Buyer-Ready Program documents, automates and hands over the work that still runs through you.
