Key takeaways
Set the instruction before selecting a method.
Identify the subject, purpose, date, basis of value and intended users. A valuation of business assets is not the same as a valuation of shares.
Reconcile and normalise the evidence.
Review accounts, owner costs, related-party arrangements and unusual items. An expense should not disappear if a purchaser would need to replace it.
Choose methods the business can support.
Income methods, including earnings capitalisation and discounted cash flow, market comparisons and asset-based techniques require different evidence. The appropriate selection depends on the business and valuation purpose.
Compare like with like and avoid double counting.
Align price and earnings definitions, distinguish business from equity value and check whether operating assets are already reflected in an earnings conclusion.
Explain the conclusion and its limitations.
Reconcile differing indications and show how assumptions affect value. For legal or tax use, confirm the recipient’s requirements and obtain separate advice.
How to value a business: a process, not a universal formula
A business valuation connects a defined question to evidence and a reasoned conclusion. Multiplying the latest profit by an attractive number skips the most important work: deciding what is being valued, testing the earnings, understanding risk and selecting an appropriate approach.
The Australian Government’s valuation guide describes several ways to assess value. Their usefulness depends on the business and the instruction. This guide explains how to organise the assessment, not how to produce a professional opinion from a few figures. If your first question is what influences your own value, start with what is my business worth?.
Step 1: Define the subject, purpose and date
Write down whether the assessment concerns an operating business, selected assets, shares or trust units. Identify the entity, ownership rights, valuation date, intended users and basis of value. “What could I sell this for?” and “What value does my tax adviser need at a past date?” are not interchangeable instructions.
For a legal, tax or contractual matter, obtain the recipient’s requirements before selecting the scope. A shareholder agreement may contain relevant provisions requiring legal interpretation. A valuation does not establish tax eligibility or resolve the meaning of an agreement.
Step 2: Assemble and reconcile the records
Collect financial statements for relevant periods, management accounts, debt schedules, asset registers, leases, ownership documents and material contracts. Explain the business model, owner responsibilities and significant changes during those periods.
Check whether management results reconcile to the accounts. Separate recurring trading from unusual transactions. Identify related-party balances and assets held outside the trading entity. Where information is missing, record the gap and its possible effect; a precise spreadsheet output does not make incomplete evidence reliable.
For a historical date, use information relevant to what was known or reasonably foreseeable then. The ATO’s tax valuation guidance explains the importance of relevant valuation-date evidence for tax-related work.
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A clear valuation conclusion starts with an agreed purpose, relevant evidence and disclosed assumptions. The report identifies the interest valued and explains the reasoning behind its conclusion.
Step 3: Normalise earnings without manufacturing profit
Normalisation seeks an earnings measure appropriate to the instruction. Review exceptional items, commercial owner remuneration, related-party rent and operating expenses. Each adjustment needs a reason and supporting evidence.
If an owner’s wage is removed but the same work must be performed by a replacement manager, the replacement cost needs consideration. Similarly, calling an expense “one-off” does not make it irrelevant if comparable maintenance or investment will recur.
EBITDA, profit after tax and owner cash receipts answer different questions. Do not change the earnings definition midway through the analysis or compare it with a benchmark using another definition. The EBITDA multiples article covers these comparability issues.
Worked example: replacing the owner's work, not just adding back pay
This is a made-up arithmetic illustration, not client information, a valuation conclusion or an industry benchmark. All amounts are Australian dollars. Suppose a business records EBITDA of $300,000, after paying its working owner $140,000. For this example, a supported estimate of the full cost of replacing the owner's duties is $170,000. A separate $20,000 expense is assumed to be genuinely non-recurring, with no replacement cost or associated future obligation.
- Start with recorded EBITDA: $300,000.
- Add back the owner's remuneration already expensed: add $140,000.
- Allow for replacement labour, including assumed employment on-costs: subtract $170,000.
- Remove the supported non-recurring expense: add $20,000.
- Illustrative adjusted EBITDA: $290,000.
Adding back the owner's pay without allowing for replacement work would instead produce $460,000 after the one-off adjustment. That would overlook $170,000 of assumed necessary operating costs. The difference comes from the evidence and duties, not a more attractive formula. In a real engagement, pay classifications, replacement requirements, on-costs and each proposed adjustment need checking. Adjusted EBITDA still requires an assessment of sustainability and risk; it is not itself business value.
Step 4: Select valuation approaches and methods supported by the evidence
International Valuation Standards recognise three principal valuation approaches: market, income and cost. Each approach may involve different valuation methods and techniques. Capitalisation of maintainable earnings and discounted cash flow are both income methods. An adjusted net asset analysis may draw on valuations of individual assets and liabilities using appropriate market, income or cost techniques; it should not automatically be equated with the IVS cost approach. The selected methods should reflect the business, valuation purpose and reliability of the available evidence. The Australian Property Institute's valuation approaches and methods protocol explains this framework.
Capitalised maintainable earnings
This income method considers an appropriate measure of sustainable earnings and a capitalisation factor reflecting the relevant risk and evidence. It can be useful where a business has a sufficiently representative trading record. An unsupported multiple does not become reliable merely because the arithmetic is simple.
The earnings measure and capitalisation factor must be compatible, including their enterprise or equity basis and tax treatment. Debt, cash, working capital and other adjustments then need treatment consistent with the resulting valuation basis. This guide deliberately provides no universal multiple or numerical industry range.
Discounted cash flow
A discounted cash-flow income method estimates the present value of future cash flows using assumptions about timing, growth, investment and risk. It can help analyse changing earnings patterns where forecasts have a supportable foundation.
A forecast should allow for the expenditure and working capital required to generate the projected cash. Test growth against contracts, capacity and operating experience. Small changes to discount-rate, growth or terminal-value assumptions can materially affect a result, so sensitivity analysis and transparent limitations matter.
The discount rate must be compatible with the cash flows being valued, including whether they represent enterprise or equity cash flows, their tax treatment, inflation assumptions and relevant risks. Nominal and real, and pre-tax and post-tax, assumptions must be consistent. A higher discount rate is not a substitute for properly assessing unsupported forecasts or identifiable operating risks.
Asset-based analysis
An asset-based analysis examines relevant assets and liabilities under the agreed basis, rather than assuming accounting carrying amounts equal current value. It may be relevant where assets drive the economics or continuing earnings evidence is limited.
Identify the ownership and condition of assets, obligations and any specialist valuation required. A profitable going concern may have economic benefits not captured by simply adding the items on its balance sheet. Conversely, a weak earnings record does not justify inventing goodwill to reach a desired figure.
Market comparisons
Comparable transactions or market observations can inform an assessment where their underlying evidence is sufficiently reliable. Check the date, size, business model, ownership rights, earnings definitions and deal terms.
An asking price is not the same as completed transaction evidence. A listed company may differ in scale, liquidity and capital access from a small private business. Explain why an observation is relevant and which differences limit its use; do not present a generic table as a valuation of the subject.
Step 5: Reconcile the result to the interest being valued
Do not simply average every method. Understand why indications differ: one may use optimistic forecasts, another may exclude an asset, and a third may rely on weak market evidence. Explain which approach carries weight and why others are cross-checks or unsuitable.
Where appropriate and supported by available evidence, a secondary method can help test the primary valuation indication. A cross-check is not required to produce the same result, and differences should be investigated rather than concealed through mechanical averaging. The ATO's market valuation guidance recommends a secondary or cross-check methodology for tax valuations where possible; this does not imply that every valuation needs three separate calculations.
Then distinguish the value of operations from equity. Relevant funding balances, cash, non-operating assets and working capital must be dealt with consistently. For a particular holding, examine its rights and restrictions rather than mechanically multiplying a controlling equity value by an ownership percentage.
Check for double counting. Adding plant, stock or goodwill to an earnings-derived figure may duplicate value already represented by the earnings stream, depending on the approach and assumptions. A reconciliation should show how each component was treated.
Worked example: moving from operating value to equity
For a separate, entirely hypothetical illustration, assume an operating enterprise value of $900,000 has already been established on a cash-free, debt-free basis with normal working capital included. This guide does not derive that value or recommend a multiple. Assume $60,000 of genuinely surplus cash and $210,000 of interest-bearing debt, with no other adjustments needed under the stated assumptions.
The simplified reconciliation is $900,000 + $60,000 − $210,000 = $750,000 of equity value. It is not $900,000 plus every item on the balance sheet. Normal operating assets and working capital are already represented by the assumed enterprise-value basis; adding them again could double count value.
Real reconciliations may require debt-like items, working-capital differences, non-operating assets and transaction-specific definitions. Not all cash is surplus. Nor is the resulting equity figure a seller's net proceeds after tax, costs or payment conditions. A minority holding needs a separate examination of its rights and restrictions, rather than automatic allocation of this illustrative amount.
Step 6: Document what the conclusion does—and does not—say
A useful report identifies the subject, purpose, date, evidence, methods, adjustments, assumptions and conclusion. It explains material uncertainty and who may rely on the work. The reader should be able to follow the reasoning, not merely find the final number.
IBV voluntarily aligns its valuation work with APES 225 guidance. A professional framework does not guarantee that a lender, tax authority or court will accept a report; intended use and recipient requirements must be confirmed. Read accountant’s letter versus valuation report when comparing proposed deliverables.
For an important transaction, use this process to prepare your brief and evaluate the proposed work—not as a substitute for a scoped valuation. Review valuation services and Fixed Professional Fees, then discuss the subject and purpose before commissioning a report.
Frequently asked questions
What is the best method to value a business?
There is no universally best method. The business model, valuation purpose and quality of the available evidence determine which approaches are appropriate and how they should be reconciled.
How do I value a small business with limited records?
Start by identifying what reliable records exist and reconciling them. Missing evidence may limit the methods available and the confidence in any conclusion; it should not be hidden behind a rule of thumb.
Can I calculate value by multiplying profit?
The arithmetic can illustrate an earnings-based approach, but the profit measure, adjustments and capitalisation factor must be justified. A multiple applied to an untested profit figure is not a complete valuation.
When is discounted cash flow useful?
It can be relevant where future cash flows and changing investment or growth patterns can be supported by credible forecasts. Unsupported projections can create misleading precision rather than a better conclusion.
Are asset values the same as balance-sheet values?
Not necessarily. Accounting amounts reflect accounting policies and may differ from values under the instructed basis. Ownership, condition, liabilities and specialist evidence can all require review.
Can I use prices advertised for similar businesses?
They may provide context, but asking prices do not prove completed transaction values. Check what is included, the earnings definition and deal terms before treating a comparison as valuation evidence.
Should I average the results from different methods?
Not automatically. Where appropriate and supported by evidence, a secondary method can test the primary indication. Investigate why indications differ and assess the relevance and reliability of each method. A cross-check need not produce the same result; mechanical averaging can conceal incompatible assumptions or weak evidence.
Do I add equipment and goodwill to an earnings valuation?
Only with a consistent explanation of what is already included. Operating assets and goodwill may already contribute to the earnings-derived value; adding them again can double count economic benefits.
How is a share valuation different from a business valuation?
A share valuation considers the entity’s equity and the specific rights of the holding. Debt, cash, other assets and ownership restrictions mean the result may differ from a simple percentage of operating business value.
Can I use a self-calculated value for tax or legal purposes?
Ask the relevant adviser what evidence and reporting are required. A self-calculated estimate does not establish statutory compliance, tax eligibility or acceptance by the intended recipient.
Sources and further reading
This article is general information, not a valuation of your business or legal, financial or tax advice. Confirm the purpose and intended use with the relevant adviser.
Australian Government: Value your business — general preparation and valuation approaches.
ATO: Market valuation for tax purposes — evidence and valuation considerations for tax-related work.
Australian Property Institute: Valuation approaches and methods — the three principal approaches and their methods and techniques.
APESB: APES 225 Valuation Services — voluntary alignment — scope and engagement framework for IBV’s voluntary alignment.
APESB: APES 225 guidance for voluntary alignment — professional valuation engagement and reporting guidance. IBV voluntarily aligns with APES 225; this does not imply membership-based obligations.
A clear, independent view of value — with the evidence behind it.
- Understand the conclusion — and what drives value.
- Gain an independent perspective. Move forward with confidence.
- Benchmark your business against industry performance.
- Identify strengths, risks and opportunities through SWOT analysis.
WHAT YOU GET IN A LIMITED SCOPE VALUATION REPORT
Inside your IBV™ report
Executive Summary
Conclusion of value · Method selected · Valuer qualifications
Detailed Report
Maintainable earnings · Cap rate / multiple · Premise of value
The Evidence Pack
SWOT analysis · Top Performers Report · RAVDA score
APES 225 voluntarily aligned. Report depth and supporting analysis follow your agreed package and engagement scope.
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