Valuing a business

Although there are several formulas you can use, there are no black-and-white answers on valuation techniques.

It’s important to conduct your own research, then get independent advice from a business valuer or broker. Here are four of the most commonly used valuation methods:

  1. Asset valuation
  2. Capitalised future earnings
  3. Earnings multiple
  4. Comparable sales  

  • Adds the value of the assets of the business and subtracts its liabilities
  • Determines what the business would be worth if it were closed down today and sold
  • Doesn’t take into account the ability of those assets to generate wealth in the future
  • Doesn’t take into account goodwill
  • For these reasons, asset valuation may understate the true value of the business 

How it works

  • Add up the value of all the assets such as cash, stock, plant and equipment and receivables
  • Add up liabilities, such as any bank debts and payments due
  • Subtract the liabilities from the assets to get the net asset value


  • Richard wants to buy a manufacturing business. Here’s an extract from the balance sheet:

An extract from the balance sheet.
  • The business has $300,000 of assets and $200,000 of liabilities
  • The net asset value is $100,000

What about goodwill?

  • Goodwill is the difference between the true value of a business and the value of its net assets
  • It can be crucial to the value of retail and service-based businesses
  • Asset valuation doesn’t include a value for goodwill, so may understate the true value of a business
  • For example, if you value a hair salon, where service, location and reputation are important, the value of any goodwill would have to be added to net assets to get a valuation
  • Goodwill may or may not be transferred if you buy a business, since it can come from physical features like location, or from personal factors, like the owner’s reputation or relationships with customers or suppliers
  • If a business is underperforming and has no goodwill, then using net asset valuation could be an accurate way to value it 

  • When you buy a business, you’re buying its assets and the right to all profits the business might generate
  • Capitalising future earnings is the most common method used to value small businesses
  • It considers the rate of return on investment (ROI) that you can expect to get from the business

How it works

  • Work out the average net profit of the business over the last three years using its profit-and-loss statements, adjusting profit for one-off expenses or other irregular items each year
  • Decide on the annual rate of return you’re looking for (e.g. 20 per cent)
  • There are no rules about the number you choose, except higher risk should give higher returns
  • Compare the business with other investment opportunities
  • You can also look at the rate of return that similar businesses in your industry achieve
  • Divide net profits by the rate of return to determine the value of the business, then multiply by 100


David is looking at buying a bakery business with average net profits of $100,000 per annum after adjustments. David wants an annual rate of return of 20 per cent. The capitalised earnings valuation is:

The capitalised earnings valuation.
  • David will pay $500,000 now for a business he believes will earn $100,000 a year plus 20 per cent more profit each year into the future

  • Multiply the business’ earnings before interest and tax (EBIT) by your selected multiple
  • For example, you might value the business at twice its annual earnings – so a business with an EBIT of $200,000 might be valued at $400,000
  • The multiple you choose will depend on the industry and the growth potential of the business
  • A service-based business might be valued at as little as one year's earnings, while an established business with sustainable profits might sell for as much as six times earnings 

  • Whatever other valuation method you use, you should also look at prices for recent sales of similar businesses
  • Research what’s happening in the market you’re interested in
  • Speak to business brokers and gauge their feelings about the business’ value
  • A broker may know what similar operations are selling for and how the market is placed
  • Check business-for-sale listings in industry magazines, newspapers or websites 

Valuing a business

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Important information

As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb)