Ask a buyer, and you will usually get a very different number. That gap is where most sale conversations begin.
A business is not worth what you have put into it, or what you need to fund your retirement. It is worth what a willing buyer will pay for the future profit it can reasonably be expected to produce.
That shift, from effort and need to future return, is where a realistic valuation starts.
The most common mistake is valuing on turnover. Revenue is vanity. A business turning over three million but barely breaking even is worth far less than one turning over one million with strong margins.
Buyers are buying profit, so profit is what gets valued, and not the figure on your tax return. A valuation uses normalised earnings, the true profit a new owner would enjoy once the books are cleaned up.
That means adding back an above-market owner's salary, the car run through the business and one-off costs, while stripping out any income that leaves when you do.
A multiple is then applied to those earnings. A business earning two hundred thousand dollars in adjusted profit might sell for 1.5 times, or as much as 3.5 times.
That is the difference between three hundred thousand dollars and seven hundred thousand, and it is driven almost entirely by risk.
Recurring revenue, a spread of customers, documented systems and a capable team all lift the multiple. The biggest factor is owner dependence. If you are the business, if you hold the relationships and make every decision, a buyer sees risk, and risk pulls the price down.
One trap is worth naming. Many owners research their value by searching for similar businesses listed online and noting the asking prices.
It feels like sensible homework, but an asking price is only what a seller hopes to get. It is not the value, and it is not what the business will sell for.
Plenty of businesses are listed at four or five times earnings and are still on the market a year later. Listed is not sold, and sold is not the same as value.
The best time to find out what your business is worth is not the day you decide to sell. It is two or three years earlier. A proper appraisal does more than give you a figure.
It shows you which levers to pull to lift it, whether that is reducing owner dependence, tightening margins or locking in recurring revenue. Owners who get valued early, and act on the advice, routinely sell for more than those who wait.
If you have never had your business professionally appraised, that is the place to start. You might be pleasantly surprised, or you might get a reality check. Either way, you will finally know your real number.
Zoran Sarabaca is the founder and Director of Xcllusive Business Sales one of Australia's leading business brokerages. Xcllusive has helped more than 900 owners sell their businesses with a process built on accurate appraisals vetted buyers and strict confidentiality. Initial consultations and appraisals are obligation free. Call 1800 825 831 www.xcllusive.com.au
