The short answer
A small business is worth what a willing but not anxious buyer would pay a willing but not anxious seller, both acting knowledgeably and at arm's length. That is the market value test from Spencer v Commonwealth (1907), and it is the number every method below is trying to reach. For an established, profitable small business the usual route is an earnings multiple: restate the profit to what an arm's-length owner would earn, settle the level of earnings the business can sustain, and multiply it by a range supported by what comparable businesses sell for. Australian private businesses with less than $5m of EBITDA typically change hands at roughly two to six times normalised earnings, well below listed companies and well below the US charts owners find online.
Two things decide whether the answer is any good. The first is the earnings figure, because a multiple applied to the wrong profit is wrong by the whole multiple. The second is honesty about risk: owner dependence, customer concentration and the lease move a business from the bottom of its range to the top. The result is always a range, not a point. If you want a quick indicative range first, the free calculator at /tools/business-valuation-calculator gives one; the rest of this guide is the method a valuer actually follows.
The three methods valuers use, and when each applies
Almost every small business valuation in Australia draws on one of three method families. The method is chosen to fit the business, not applied by default, and choosing the wrong one is the error reviewers find first. Each method is set out in more detail at /resources/business-valuation-methods-explained.
| Method | How it works | Suits | Watch for |
|---|---|---|---|
| Capitalisation of future maintainable earnings (an earnings multiple) | Maintainable normalised EBITDA multiplied by a multiple supported by comparable sales | Established, profitable trading businesses: most small businesses | A peak year used as maintainable; add-backs with no paperwork; US multiples |
| Discounted cash flow (DCF) | Free cash flow forecast over usually three to five years, plus a terminal value, discounted to today at a risk-adjusted rate | Businesses whose future will differ from the past: forecastable growth, a signed contract that changes revenue, a finite-life licence | Forecasts that cannot be evidenced; reviewers reject DCF built on unsupported forecasts |
| Net assets | Each asset restated to market value, less liabilities | Asset-heavy, loss-making or underperforming businesses, and entities that hold rather than trade | Used alone on a profitable business, it ignores the goodwill |
Industries that are priced in their own units
Some small businesses are quoted in units other than an EBITDA multiple. Rent rolls are priced as a multiple of annual management income. Accounting practices are priced in cents in the dollar of annual fees, with the traditional benchmark about one dollar for each dollar of fees. Revenue multiples are legitimate for recurring-revenue, rent-roll and pre-profit businesses, and they link back to earnings through the margin bridge: revenue multiple = EBITDA multiple x EBITDA margin. Treat any rule of thumb as a cross-check rather than a method: it tells you whether a conclusion is in the right territory, not where in that territory your business sits.
Step 1: gather three years of financial statements
Start with the paper a valuer would ask for, because the same paper is what makes the number stand up later.
- ·Profit and loss statements and balance sheets for the last three years, so the trend shows rather than a single snapshot
- ·The detail behind the add-backs: your salary and drawings, family wages, one-off costs and any personal expenses run through the business
- ·The customer picture: enough revenue detail to show how concentrated, or how spread, your income really is
- ·The transfer terms: the lease, key contracts, licences and anything else a new owner would need on day one
- ·An honest account of what only you can do, and what the team handles without you
Step 2: normalise the earnings
Reported profit was prepared for tax, not for value. Restate each year to what the business would earn for a hypothetical arm's-length owner. This is where most of the value swing hides, and every adjustment needs documents behind it: invoices, payroll, BAS and bank statements.
- ·Owner remuneration: restate what you pay yourself to the market cost of the role you actually perform. This cuts both ways
- ·Related-party arrangements: rent paid to your own family trust, family members on the payroll and management fees to a connected entity, each restated to arm's-length terms
- ·One-off items: a legal settlement, an insurance recovery, a government grant (removed as income) or an abnormal write-off
- ·Private expenses run through the business: vehicles, travel and subscriptions an arm's-length owner would not carry
- ·Not an add-back: ongoing marketing, essential software and any spending that drives current revenue. You cannot add back the engine
Step 3: settle the maintainable earnings figure
With three normalised years side by side, judge the level of earnings the business can sustain looking forward. This is a judgement, not a formula. A blind three-year average understates a business that has grown steadily; the best year overstates one whose last year was a spike. Ask what current trading, the order book and the customer base actually support. One rule matters even at this stage: use normalised EBITDA, which charges a market salary for the owner's role, or seller's discretionary earnings (SDE), which adds the working owner's full pay back to profit, and never mix the two. SDE is the larger figure and attracts a lower multiple: an SDE multiple of 2.5x and an EBITDA multiple of 4x can describe the same business.
Steps 4 and 5: choose the method, then a multiple range from evidence
For an established, profitable business the method is an earnings multiple; switch to DCF or net assets only for the reasons in the table above. Then apply the multiple as a range, never a point. The ranges below are Oliver Group's July 2026 edition for businesses with normalised EBITDA under $500k, on an enterprise value basis (debt-free, cash-free, going concern). Larger businesses in the same industry command higher multiples; the full table by size band is at /insights/ebitda-multiples-by-industry-australia.
Where your business sits within its range is a risk judgement. It moves up for recurring revenue, a spread customer base, a secure lease, a team that runs without you and credible growth. It moves down for dependence on you personally, one or two customers supplying most of the revenue, a short lease and earnings that must be re-won every year.
| Industry | Low | Mid | High |
|---|---|---|---|
| Healthcare (medical, dental, allied health) | 3.0x | 3.75x | 4.5x |
| IT and managed services | 3.0x | 3.5x | 4.0x |
| Professional services (accounting, engineering, consulting) | 2.5x | 3.0x | 3.5x |
| Manufacturing and engineering | 2.5x | 3.0x | 3.5x |
| Wholesale and distribution | 2.0x | 2.5x | 3.0x |
| Transport and logistics | 2.0x | 2.5x | 3.0x |
| Construction and trade services | 1.5x | 2.0x | 2.5x |
| Retail | 1.5x | 2.0x | 2.5x |
| Hospitality (cafes, restaurants, catering) | 1.5x | 2.0x | 2.5x |
Step 6: from enterprise value to the value of the business you own
Maintainable earnings multiplied by the multiple gives enterprise value: the value of the operating business on a debt-free, cash-free basis. To reach the value of your shares or your interest, deduct interest-bearing debt the buyer would inherit, add surplus assets the business does not need to trade (excess cash, an investment held in the company), and normalise working capital, because a business handed over with stripped stock and stretched creditors is worth less than the same business handed over ready to trade. Blurring enterprise value and equity value can move the answer by the entire balance of the borrowings.
Step 7: cross-check, then conclude at a range
Test the conclusion before you believe it. Compare it with net tangible assets: if the earnings value sits well above them, the difference is goodwill, and the question is whether that goodwill would transfer to a new owner or leave with you. Run a pessimistic case (your largest customer leaves, your salary is set at the full market rate, the multiple sits at the bottom of the range) and an optimistic one. A narrow gap between them means the value is robust; a wide gap means it rests on judgements a sceptical buyer will probe. Then conclude at a range, and identify the point within it the evidence best defends.
A worked example (hypothetical)
Take a hypothetical IT managed services business with annual turnover of $1.6m. Reported EBITDA for the latest year is $260,000. The owner pays themselves $60,000 for a general manager role that would cost $140,000 at market, so $80,000 is deducted. The owner's vehicle and phone, $15,000 a year, run through the business and are added back. A one-off $25,000 legal cost from a lease dispute is added back. Normalised EBITDA for the latest year is $220,000. The two years before, normalised on the same basis, were $190,000 and $205,000: steady growth, so maintainable EBITDA of $215,000 is adopted, close to the latest year but not the peak, because the newest contracts have less than a year of history.
The table puts IT and managed services businesses of this size at 3.0x to 4.0x. About 70% of revenue comes from monthly managed services contracts, which supports the multiple; the largest client supplies 25% of revenue and the owner holds the key relationships, which weighs against it. A mid-range 3.5x is adopted, tested across 3.25x to 3.75x. Enterprise value is $215,000 x 3.5 = $752,500, within a range of $698,750 to $806,250. Deducting equipment finance of $40,000 and adding surplus cash of $30,000 gives an equity value of $742,500, within a range of $688,750 to $796,250: about $690,000 to $800,000, with about $740,000 the most supportable point. Net tangible assets of about $90,000 sit well below that, so most of the value is goodwill, which is why the owner's handover of client relationships matters as much as the arithmetic.
Five mistakes that move a small business valuation the wrong way
- ·Using the best year as maintainable earnings, or a three-year average for a business that is clearly growing or shrinking
- ·Adding back costs the business needs to keep its revenue, such as marketing and essential software
- ·Applying a US or listed-company multiple to a small Australian private business
- ·Mixing SDE and EBITDA, so an owner's pay is counted once in the earnings and again in the multiple
- ·Stopping at enterprise value and forgetting the debt, the surplus cash and the working capital
When you need an independent valuation, and what it costs
Value it yourself while the number is only for you: tracking value year to year, preparing for a sale, sizing a decision. The moment someone else will rely on the figure (the ATO for a capital gains tax event, a buyer, a bank, a business partner, an executor) a self-assessed value fails on independence, because an owner cannot be the arm's-length party the market value test assumes. That is when a signed, independent report earns its fee.
Oliver Group's fees are set by the annual turnover of the business: a Small Business Valuation is $1,495 + GST for turnover under $2 million, a Medium Business Valuation is $2,495 + GST for turnover between $2 million and $10 million, and a Large Business Valuation is $3,495 + GST for turnover over $10 million. Small-business reports are delivered in 2 business days and medium-business reports in 3 business days; the delivery date for a Large Business Valuation is agreed before commencement. Delivery time starts once payment and all required information have been received. The fee is fixed in writing before work begins and never depends on the concluded value. The fixed fee does not cover a cross-check of the conclusion against a second or third methodology, expert witness work or tax advice. Oliver Group prepares valuations only; whether an event needs a market value, and what to do with it, are questions for your accountant.