There are various complex formulas available for calculating the value of a business, and you can find numerous methods through online research.
However, for small businesses, we recommend a straightforward approach to valuation: multiplying the owner’s actual profit by a multiplier. Actual profit includes pre-tax business earnings, owner’s salary, and personal expenses covered by the business. The multiplier can be determined based on factors like the industry and operational conditions, with a typical range of 2 to 3 as a reference.
For example, let’s consider a financial report where the pre-tax business profit is 50,000 AUD, the owner’s salary is 40,000 AUD, and personal expenses covered by the business, including items like vehicle expenses, family salaries, and shareholder dividends, amount to approximately 20,000 AUD. In this case, the owner’s actual profit would be 110,000 AUD. If you use a multiplier of 2, the estimated value would be 220,000 AUD; if the multiplier is 3, it would be 330,000 AUD.
There are various strategies to legitimately optimize tax efficiency. Experienced buyers consider more than just financial statement profits and conduct a comprehensive analysis of actual earnings. However, when selling a business, it’s advisable to ensure that financial reports clearly reflect the business’s operational activities and profitability to facilitate the buyer’s estimation. This requires effective communication and advanced planning with an accountant.
The specific multiplier to use depends on various factors specific to the business, including the completeness and verifiability of financial data, the stability of income and profits, the extent to which the business relies on the owner versus management, the presence of supply contracts, the remaining lease term, and the reasonableness of lease terms.
For precise valuation guidance, we recommend consulting with both accountants and business brokers.