How to increase business value before selling: two levers
To increase what a business is worth before a sale, an owner can pull one of two levers: grow maintainable earnings, or increase the multiple a buyer is willing to pay for those earnings. Most owners instinctively focus on the first — chase a bit more revenue, land one more contract, push margin in the final year before a sale process starts. That is real value, but it is also the slower and more expensive lever. The multiple is set by how risky the earnings look to a buyer, not by their size. A business that materially reduces its owner-dependence risk without adding a dollar of profit can move its multiple more than a business that grows earnings while the risk profile stays the same. This page works through why that is true, what the specific risk levers are, what a valuer or buyer is actually assessing when they set a multiple, and what is realistically fixable in the two to three years most owners have before a sale.
Why reducing risk can move value more than growing earnings
The multiple applies to the whole earnings base, not just the increment an owner adds in the run-up to sale, which is why de-risking often outweighs earnings growth over a short runway — a worked, illustrative example shows why. Take a services business with $1m of normalised earnings, valued by the market toward the lower end of the roughly two-to-six-times range typical for Australian private businesses under $5m of EBITDA, because a buyer would need to replace the owner's client relationships and technical delivery on day one. Two illustrative exit strategies over a three-year runway. Strategy A: grow earnings through a mix of new revenue and cost discipline, while the multiple stays flat because the business still depends entirely on the owner — the uplift is confined to the earnings growth itself. Strategy B: earnings stay flat, but the owner spends the same three years building a second-tier management layer, diversifying the client base so no single customer dominates revenue, and moving key clients onto multi-year contracts. A buyer now underwrites materially less transition risk, and the market is willing to pay a higher multiple for the same $1m of earnings. Because the multiple applies to the whole earnings base, even a modest upward move in the multiple is worth more, in dollar terms, than the same fractional increase applied only to earnings — and reducing owner-dependence risk does something earnings growth alone does not: it fixes the specific risk most buyers will discount for regardless of how big the earnings number is.
The four levers that move the multiple
Market value under IVS 104 and the Spencer v Commonwealth (1907) principle it codifies is what a willing but not anxious buyer would pay a willing but not anxious seller, both acting knowledgeably and at arm's length — and a knowledgeable buyer prices transition risk into the multiple before agreeing a figure. These are the factors a buyer, or their valuer, is actually assessing when they select a multiple from the comparable range rather than defaulting to the market median.
- ·Owner dependence — can the business run, sell and deliver without the current owner in the room? Buyers price this through a key-person or transition-risk discount; the fix is documented processes, a second-tier manager who can run operations, and client relationships that sit with the business rather than a single individual.
- ·Customer concentration — what share of revenue sits with the top one, three and five customers? A single customer above roughly 15–20% of revenue is a common threshold where buyers start applying a specific discount or structuring part of the price as an earn-out tied to retention.
- ·Contract quality — are customer relationships evidenced by written, assignable, multi-year agreements, or informal and terminable on short notice? Recurring, contracted revenue is priced very differently from repeat-but-informal revenue, even when the historical retention rate looks identical.
- ·Clean financials — are the numbers a buyer can rely on without extensive adjustment: consistent add-back treatment, related-party transactions disclosed and arm's length, no material undocumented cash transactions, financials that reconcile cleanly to tax returns? Financial credibility affects both the multiple a buyer is willing to underwrite and the speed and cost of due diligence.
What can I realistically fix in 12 months versus 2–3 years before selling?
Not every lever moves at the same speed, which matters for sequencing a pre-sale plan: financial hygiene can be fixed within a year, while owner-dependence usually needs the full two-to-three-year runway.
- ·Under 12 months — mostly financial hygiene: standardising add-backs with supporting evidence, cleaning up related-party balances, formalising informal arrangements (family wages, personal expenses run through the business) so the reported earnings need less adjustment in diligence, and getting a management accounts process that produces reliable monthly numbers.
- ·12–24 months — contract and concentration work: converting the largest informal customer relationships onto written agreements, actively diversifying new business development away from the top few accounts, and starting to document the processes and systems that currently exist only in the owner's head.
- ·24–36 months — owner-dependence structural change: appointing or promoting a second-tier manager with real decision authority, transferring key client relationships so more than one person in the business can service them, and building a track record of the business performing when the owner is deliberately less involved (this is the evidence a buyer's due diligence team will actually test for).
- ·The general pattern: financial hygiene is fast but has a ceiling on impact; owner-dependence reduction takes the longest but tends to have the largest effect on the multiple because it is what most buyers are actually afraid of.
Should my own salary be added back, and what add-backs actually survive scrutiny?
An owner's salary can be added back and replaced with a market-rate cost for an equivalent manager, but only where the adjustment is documented and consistent — add-backs are where sale processes most often lose credibility, because sellers are incentivised to add back generously and buyers know it. This is also the area the ATO's market valuation guidance scrutinises most closely, because normalisations affect the earnings base a multiple is applied to. A normalisation a buyer's advisers, or a reviewer applying that guidance, will accept generally has three characteristics: it is documented with contemporaneous evidence (invoices, payroll records, minutes) rather than asserted after the fact; it is consistent year on year rather than appearing only in the numbers being presented for sale; and it is a genuine one-off or non-arm's-length item rather than a cost the business would need to incur again under new ownership. Common defensible categories include above-market owner remuneration normalised to a market salary for an equivalent manager, one-off professional fees tied to a specific non-recurring event, and personal expenses run through the business with clear documentation. Common categories that do not survive scrutiny include recurring 'one-off' costs that appear in three consecutive years, add-backs with no supporting paper trail, and adjustments that assume a cost simply disappears post-sale when in practice a buyer will still need to incur it — for example, assuming no replacement management cost when the owner's discounted salary is added back in full. Building this discipline twelve to eighteen months before a sale process, rather than assembling it retrospectively when a buyer's accountant starts asking questions, is one of the highest-leverage, lowest-cost steps in pre-sale preparation.
How long before selling should I get a baseline valuation?
A baseline valuation two to three years before an intended sale does two things a spreadsheet cannot. First, it establishes the current supportable range, prepared under APES 225 and with ATO market valuation expectations in mind, and the methodology-relevant reasons the multiple sits where it does — which of the four levers above is actually depressing the multiple in this specific business, rather than a generic list of what buyers care about. Second, it creates a measurement point. Re-running a valuation twelve to eighteen months later, using the same methodology, shows whether the concentration, contract and dependence work is actually moving the multiple or only moving the earnings. Prismi's Comprehensive tier (from $3,995 + GST, dual methodology with cross-check, 15–25 business days) is the level most owners use for this kind of pre-sale baseline; where small business CGT concessions will also be claimed on sale, the Defensible Valuation File (from $8,995 + GST, triple methodology, 25–35 business days) is the more defensible standard. This is useful evidence for the owner deciding where to spend the next year of effort, and it is useful for an adviser structuring the eventual sale process, because it separates the story a business broker will tell from a methodology-tested view of where the value actually sits. It is not a substitute for a transaction appraisal at the point of sale, and Prismi does not provide sale brokerage, deal structuring or negotiation advice — a baseline valuation is independent evidence to inform the owner's and their adviser's planning, prepared with the same methodology discipline as a valuation prepared for a completed transaction.
What this is not
This is not sale-readiness coaching or a broker's opinion of achievable price, and Prismi does not provide either. It is independent valuation evidence: a documented, methodology-led view of where a business's value currently sits and which factors are most affecting the multiple, prepared under APES 225 to the same evidentiary standard as our tax-purpose valuation work. For the sale process itself — positioning, buyer negotiation, deal structure — that is the role of a business broker, M&A adviser or lawyer; a baseline valuation from Prismi is complementary evidence for that process, not a substitute for it. Prismi is not a registered tax agent and does not provide tax, legal or financial advice; small business CGT concession eligibility and add-back treatment for tax purposes are matters for the client's accountant, working from the valuation evidence.