How to value a small business in Australia
Most small businesses are priced on a simple idea: a buyer is paying for a stream of future earnings, so the price is some multiple of those earnings. The hard part is that both halves of that sentence, the earnings and the multiple, are softer than they look. This guide explains how the number is actually built, where sellers tilt it in their favour, and how to sense-check an asking price before you negotiate.
A note on what this is and isn't. A formal business valuation is a regulated, professional exercise, and if you need one for finance, tax, a dispute or a partnership exit, engage an accredited valuer. What follows is the buyer's working method — how to form your own view of whether a price is in the right postcode.
Want a fast read on a specific target? A free SMEInspect Snapshot screens the public record in minutes. The Full Report adds the SMEInspect Estimate — a risk-adjusted indicative range that sense-checks the asking price against the documents you have.
Start with the earnings, not the price
For businesses under a few million in revenue, two earnings measures do most of the work.
Seller's Discretionary Earnings (SDE) is the standard basis for owner-operated businesses. It's the profit available to a single full-time owner: net profit, plus the owner's salary and benefits, plus interest, tax, depreciation and amortisation, plus genuine one-off costs. SDE answers the question an owner-operator is really asking — what will this business put in my pocket if I run it?
EBITDA (earnings before interest, tax, depreciation and amortisation) is used for larger businesses that run with a management layer rather than a hands-on owner. It doesn't add back an owner's salary, because the business pays a manager to do that job. As a business grows past the owner-operator stage, the basis tends to shift from SDE to EBITDA.
Get this right first, because the multiple is applied to whichever number you land on. An inflated earnings figure with a "reasonable" multiple is still an inflated price.
Interrogate the add-backs
Add-backs are where a normalised earnings figure is built, and where optimism creeps in. The legitimate ones are real: an owner's above-market salary, personal expenses run through the business, a genuinely one-off legal cost, a redundancy that won't recur.
The questionable ones are dressed-up operating costs. "Marketing we won't need to repeat"? You probably will. "A bad debt that won't happen again"? Bad debts are a cost of doing business. For each add-back, apply one test: does this cost genuinely disappear under new ownership. If it doesn't, it's not an add-back, it's a recurring expense, and it belongs in the earnings you're buying.
Rebuild the earnings yourself from the tax returns and bank statements, then compare your figure to the seller's. The difference is the negotiation.
Understand the multiple
The multiple is the market's shorthand for risk and growth. A lower-risk, faster-growing business with less owner dependence commands a higher multiple. A risky, flat, owner-dependent one gets a lower one.
For small owner-operated Australian businesses, SDE multiples commonly sit in a low single-digit range, often somewhere around two to three times SDE, with plenty of variation by industry, size and quality. Larger businesses priced on EBITDA attract higher multiples as they grow; Australian search-fund acquisitions, for instance, have been reported around an average of 4.2 times EBITDA. Treat any rule-of-thumb multiple as a starting point to be adjusted, not a fact — industry norms, recent comparable sales and the specific risk profile of the business all move it from there.
Recurring or contracted revenue, a spread of customers rather than a handful, low owner dependence, documented systems, a transferable lease, clean books, a growth trend: all of that pushes a multiple up. Customer concentration, an owner who is the business, a short or unassignable lease, licensing exposure, declining revenue, financials you can't verify: all of that pulls it down. Which is really just due diligence by another name — the multiple is what due diligence looks like once it's been turned into a number.
Why the answer is a range, not a number
Treat any single-point price with suspicion, including your own. The honest output of this exercise is a band: a low figure that assumes the risks are real, and a high figure that assumes they're manageable. The more uncertain the inputs, the wider the band should be — and the lower, because uncertainty is a cost the buyer carries.
This is the same convention you already accept from property. A Zillow Zestimate or a realestate.com.au estimate gives you a range, attaches a confidence indicator, shows the inputs behind it, and states plainly that it's a computer-generated estimate, not a professional valuation. Small-business pricing works the same way. A range with its workings shown is more useful, and more honest, than a precise number with none.
A worked sense-check
Suppose a trades business is asking $600,000. The seller presents SDE of $250,000 and calls it "2.4 times — a steal."
Rebuild the earnings first. Two of the add-backs, $30,000 of "one-off" marketing and a $15,000 "non-recurring" repair, look like normal operating costs. Strip them out and SDE is closer to $205,000. Now look at risk: one customer is 35% of revenue, and the owner personally holds the three biggest accounts. That's a business that should price toward the bottom of its multiple range, not the middle.
At, say, 2.2 times the corrected $205,000, you're around $450,000 — with a real argument for lower until the customer concentration and owner dependence are addressed through contracts and a handover. The asking price isn't necessarily wrong, but the gap between $600,000 and your sense-checked range is the thing to negotiate, and now you know exactly why.
Where SMEInspect fits
You can do all of the above by hand, and on a single serious target it's worth it. When you're screening several, or want a structured second opinion before you commit adviser fees, the Full Report runs the risk analysis against your documents and produces the SMEInspect Estimate: a risk-adjusted indicative range, with a confidence indicator and the multiple, earnings basis and adjustments shown. It sense-checks the asking price, and it gives your own judgement and your accountant a faster starting point. It doesn't replace either.
General information only — not financial, tax or valuation advice. The SMEInspect Estimate is an automated, computer-generated indicative range, not a professional valuation, and must not be relied on as the basis of a transaction. Multiples and figures cited are illustrative and vary by industry, size and market conditions. Get your own professional advice before you transact.