Quick answer
Small businesses are usually valued on the profit a new owner can expect, adjusted for the work the owner does, with assets and risk taken into account. business.gov.au describes several methods: market comparisons, return on investment, asset-based value, replacement cost and future profit. Most valuations combine methods. The key inputs are sustainable profit, how transferable it is, and the return a buyer needs for the risk.
Key points
- Value follows sustainable, transferable profit — not revenue.
- Adjust profit for a fair owner's wage before applying any method.
- The ROI method: price = profit ÷ required return.
- Risk (customer concentration, owner dependence, lease) lowers value.
Every business for sale has an asking price. Very few have a value until someone does the work. Whether you’re buying, selling or just curious what yours is worth, the principles are the same: value follows the profit a new owner can reasonably expect to keep, adjusted for the risk of keeping it.
What methods does business.gov.au describe?
business.gov.au notes there’s no single set valuation method and that combining approaches is common. The main ones:
| Method | How it works | Best for |
|---|---|---|
| Market comparison | Compare with similar businesses sold and industry formulas | Industries with frequent sales |
| Return on investment | Price = profit ÷ required return | Profitable owner-operated businesses |
| Asset-based | Tangible plus intangible assets, less liabilities | Asset-heavy businesses |
| Replacement cost | What it would cost to build the same business today | Setting a ceiling on price |
| Future profit | Projected profit based on past trends and industry | Growing businesses |
Whatever the method, remember what you’re really buying: a stream of future profit and the risk attached to it. Two businesses with identical profit can deserve very different prices if one has a long lease and loyal staff and the other depends entirely on its owner’s relationships.
Why adjust profit first?
Because the reported profit of a small business often isn’t what a new owner will earn. Before applying any method:
- Deduct a fair wage for the work the owner does. If the owner runs the kitchen 50 hours a week unpaid, the buyer will either do that job or pay someone.
- Test the add-backs — personal expenses, one-off costs — as described in our financial due diligence guide.
- Normalise unusual years. One exceptional contract shouldn’t set the price.
- Look at the trend across three to five years.
The result is sometimes called adjusted or sustainable profit. It’s the foundation of every sound valuation.
How does the ROI method work? (Illustrative)
business.gov.au gives the formula ROI = (net annual profit ÷ selling price) × 100. Rearranged: price = profit ÷ required return.
An illustrative café reports $210,000 profit. The owner works full time, unpaid. After deducting a fair manager’s wage and on-costs of $85,000 and removing $10,000 of personal expenses paid by the business, adjusted profit is about $135,000.
| Required return | Implied price |
|---|---|
| 25% | $540,000 |
| 33% | about $409,000 |
| 50% | $270,000 |
Which return is right? It depends on risk. A business with a long lease, diverse customers, trained staff and steady trends justifies a lower required return (a higher price). One dependent on the owner, a single customer or a short lease demands a higher return (a lower price). The figures here are illustrative only.
What makes a business worth more or less?
Worth more: long lease with options, diverse customer base, documented systems, trained staff who stay, recurring revenue, growing trends, well-maintained equipment.
Worth less: owner dependence, customer concentration, short or unassignable lease, declining trends, deferred maintenance, ATO or supplier arrears, poor records.
If you’re preparing to buy and want to know what funding sits behind your offer, ask us — enquiring doesn’t touch your credit file.
How do stock and equipment fit in?
In many small business sales, the price covers goodwill and plant and equipment, while stock is valued separately at settlement. Make sure the contract is clear. For asset-heavy businesses, the asset-based value acts as a floor: you shouldn’t pay much less than the equipment is worth, and you should be wary of paying far more unless profit supports it.
How do lenders see value?
Lenders look at two things: the business’s ability to service the debt from cash flow, and the security available. Goodwill is valuable to a buyer, but on its own it’s a limited form of security — it can’t be sold separately from the business. That’s why many buyers fund part of a purchase with a loan secured against property they own. Our feature on when to borrow looks at matching the facility to the purpose.
How can a seller lift value before a sale?
If you’re on the other side of the table — planning to sell in a few years — the same principles tell you where to focus:
- Reduce owner dependence. Document systems, train a second-in-charge and step back from day-to-day work.
- Diversify customers so no single account dominates. Our feature on losing your biggest customer explains why buyers care.
- Secure the lease with a sensible term and options to renew.
- Clean up the books. Separate personal expenses, lodge on time and keep BAS, accounts and bank statements consistent.
- Show a steady or rising trend across three to five years.
- Maintain equipment so buyers don’t discount for deferred spending.
Each of these lowers the risk a buyer sees, which lowers the return they demand — and raises the price they’ll pay.
Paying the right price, with the right funding
A well-researched valuation protects you from overpaying and gives you a strong negotiating position. The right funding structure then lets you settle and still have working capital to run the business from day one — see our step-by-step guide to buying a business.
We consider property-secured loans from $20,000 to $5,000,000 over residential or commercial property, and unsecured facilities for trading businesses typically from $5,000 to $500,000. There’s no credit check to start, your enquiry isn’t sold on, and a real person calls to talk through the deal. Please complete the form accurately — price, your contribution, any property you own — so we can suggest the right structure first time.
Frequently asked questions
What's the most common way to value a small business?
Most small business valuations rest on adjusted profit — what the business earns after paying a fair wage for the work the owner does — combined with a required return or multiple that reflects the risk. Asset values set a floor for asset-heavy businesses.
What is the ROI method?
business.gov.au describes it as ROI = (net annual profit ÷ selling price) × 100. Rearranged, price = profit ÷ required return. If you need a 33% return and the business makes $150,000, the price would be about $455,000.
Is goodwill part of the value?
Yes. Goodwill is the value above the net tangible assets — the reputation, customer relationships and earning capacity. It's only worth paying for if it transfers to you.
Should I get a professional valuation?
For larger or more complex purchases, yes. An accountant or valuer experienced in your industry can combine methods and benchmark against real sales.
Does the valuation affect how much I can borrow?
Lenders assess the business's cash flow and the security available. Goodwill generally isn't strong security on its own, which is why many buyers use property they own to secure funding.