Three numbers, three different things
Most disagreements about what a business is worth are really disagreements about which number is being discussed. The seller quotes one, the broker markets another, and the buyer's accountant is modelling a third. Before any calculation, separate the three — because the negotiation runs on the gaps between them.
- ·Asking price — the number the seller or their broker puts on the campaign. It is a negotiating position, not a valuation. It can be anchored to anything: what the owner needs for retirement, what a competitor reportedly sold for, what the broker believes the market will wear.
- ·Market value — 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 Spencer v Commonwealth (1907) principle, carried into IVS 104, and it is the number a professional valuation concludes.
- ·Strategic value — what one specific buyer might pay because the business is worth more in their hands: a competitor removing a rival, an acquirer buying your contracts, your licence or your capability. Strategic value is real, but it is buyer-specific — it cannot be banked until that buyer is at the table.
The seven steps at a glance
A sale campaign tests whether strategic value exists. A valuation establishes market value, so you know what a good offer looks like and what walking away costs. The seven steps below are the same sequence a professional valuer runs. Steps 1 and 2 are where the value argument is won or lost; steps 3 to 7 are where it is tested. Each step produces something a buyer's accountant can verify — which is what makes the result defensible rather than aspirational.
- ·Normalise the earnings — restate reported profit to show what the business genuinely earns for an owner, on a maintainable basis
- ·Identify and document the add-backs — every adjustment supported by evidence, not assertion
- ·Choose the methodology — earnings-based for stable trading businesses, DCF only where forecasts can be substantiated, net assets where earnings do not support goodwill
- ·Gather the multiple evidence — comparable private transactions and industry benchmarks, matched for size
- ·Calculate and adjust — from enterprise value to equity value: deduct debt, add surplus assets, normalise working capital
- ·Cross-check — test the conclusion against a second method and the buyer's own arithmetic
- ·Conclude at a range — and identify the most supportable position within it
Steps 1 and 2 — normalise the earnings, then prove the add-backs
Normalisation restates reported profit to show what the business genuinely earns for a single owner on a maintainable basis. Start with EBITDA from the last three to five years of financial statements. Adjust the owner's remuneration to a market replacement salary — what it would cost to hire a manager to do the owner's actual job, not zero and not the inflated figure in the accounts. Strip genuine one-off items: the flood claim, the litigation, the once-in-a-decade fit-out. Restate related-party arrangements to market terms, most commonly rent paid to a family entity above or below what an agent would ask. Remove non-operating income — interest on surplus cash, gains on asset sales. What remains is maintainable earnings: the figure the multiple attaches to. Step 2 is the discipline that makes step 1 credible. Every add-back is a claim that the buyer will not bear a cost you bore, and every claim needs a document — payroll records for the salary adjustment, the lease and a rental appraisal for the rent restatement, invoices for the one-offs. An add-back schedule with evidence attached survives due diligence. An add-back schedule built on assertion sets the price up to fall.
The add-backs buyers' accountants reject
Due diligence is where optimistic add-back schedules go to die. Buyers' accountants have seen every version of the list below, and each entry that fails scrutiny does double damage — it comes off the earnings figure, and it discredits the entries that were legitimate. The recurring offenders:
- ·Owner salary added back to nil, rather than adjusted to the market cost of replacing the owner's actual role
- ·"One-off" costs that appear every year — repairs, recruitment fees and legal costs are rarely one-offs across a three-year window
- ·Family members added back from the payroll while they still perform real work a buyer would have to pay someone to do
- ·Marketing added back as discretionary when it plainly drives the revenue being sold
- ·Rent restated to a "market" figure supported by nothing but the owner's own opinion
- ·An unusually strong year — a grant period, a one-off contract, a boom in the sector — treated as the maintainable base
- ·Personal expenses run through the business, added back with no documentation identifying them
Steps 3 and 4 — choose the method, then find the multiple
Step 3 is methodology. For a stable trading business with transferable goodwill, capitalisation of maintainable earnings — and its forward-looking form, future maintainable earnings — is the workhorse; our explainer on the future maintainable earnings method covers the mechanics. Discounted cash flow suits businesses in a genuine growth or investment phase, but only where the forecasts can be substantiated — a DCF built on a hopeful spreadsheet is weaker evidence than a capitalisation built on documented history. Net asset value applies where the business is asset-heavy or where earnings do not support value beyond the assets, and it serves as a floor cross-check for everyone else. Step 4 is the multiple, and this is where owner expectations meet reality. The evidence that counts: comparable private transactions in the same industry at a similar size, industry benchmark data, and — treated cautiously — broker transaction records. The evidence that does not count: listed-company multiples, because a listed company's scale, liquidity and management depth command a premium a private SME cannot borrow, and the multiple a mate reportedly achieved. Most private Australian SMEs transact on multiples of maintainable EBITDA in the low single digits. The upper end of any industry range is earned by scale, contracted revenue and independence from the owner — not by asking. Our guide to EBITDA multiples by industry sets out the typical ranges and what moves a business within them.
Steps 5, 6 and 7 — calculate, cross-check, conclude at a range
Step 5 turns an earnings figure and a multiple into a price. Maintainable EBITDA times the multiple gives enterprise value. From there, deduct interest-bearing debt the buyer inherits, add surplus assets the business does not need to trade — the excess cash, the investment property sitting 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. Step 6 is the cross-check. Test the conclusion against a second methodology: does net asset value sit comfortably below the earnings-based figure, confirming the goodwill is real? Run the buyer's arithmetic: after funding costs and a market salary for themselves, does the purchaser recover the price in a commercially sensible period? And apply the transferable goodwill test: if the earnings depend on the owner's licence, relationships or personal reputation, part of the value walks out the door at settlement, and the multiple must reflect it. Step 7 is the conclusion — and it is a range, not a point. Different defensible choices of multiple and add-back treatment produce a band of supportable outcomes. The most supportable position within that band is the one the evidence best defends, and knowing where it sits — and why — is precisely the preparation a negotiation rewards.
When a formal pre-sale valuation pays for itself
A formal pre-sale valuation earns its fee in two places. The first is negotiation. A seller who arrives with a documented normalisation, an evidenced add-back schedule and multiple evidence matched to their size negotiates from a position built to survive due diligence — and the arithmetic is forgiving: on a business changing hands for seven figures, the fee is recovered if the evidence shifts the outcome by less than one per cent. It also protects against the quieter failure, underpricing, where an owner anchored to an old broker appraisal leaves value on the table without ever knowing it. The second is tax planning, and it is time-critical. The small business CGT concessions in Division 152 of the ITAA 1997 can reduce the tax on a sale materially, but eligibility turns on market values — most sharply the $6m maximum net asset value test, which is assessed on the market value of net assets just before the CGT event, alongside the active asset test in s 152-35. An owner who knows the supportable value of the business a year before sale gives their accountant room to plan. An owner who discovers it after the contract is signed has no room at all. To be clear about roles: Prismi prepares the independent valuation evidence. We are not a registered tax agent and do not provide tax, legal or financial advice — your accountant applies the concessions and structures the sale.
Where this fits with what we do
For a pre-sale valuation of a trading business with goodwill, add-backs and related-party arrangements, the Comprehensive tier (from $3,995 + GST, 15–25 business days) is typically the right level — multiple methodologies tested, normalised earnings, sensitivity analysis. Where small business CGT concessions will be claimed, where the value is likely to be contested, or where the file may be reviewed, the Defensible Valuation File (from $8,995 + GST) is the appropriate standard. Two features of how we work matter particularly before a sale. Fees are fixed at engagement and never contingent on the outcome — a valuation that shares in the sale price is advocacy, not evidence, and a buyer's accountant will treat it accordingly. And the conclusion is not for sale: where a client wants a report to justify a predetermined asking price, we will say so and decline the engagement on those terms. The report is prepared under APES 225, senior-reviewer signed, with ATO market valuation expectations in mind, and the working file is retained for ten years — so the same document that anchors the negotiation is documented well enough to support the tax positions that follow it.