A business in the $1 million to $15 million range is valued on its pre-tax earnings and the risk attached to those earnings continuing without you. In practice that lands between a 1x and 5x multiple. This explains what moves a business within that range.
A privately held New Zealand business is valued on its normalised pre-tax earnings multiplied by a figure that reflects how safe those earnings look to a buyer. In the $1 million to $15 million range that multiple sits between roughly 1 and 5.
Normalised earnings are not the profit figure at the bottom of your accounts. They are what the business would earn under a new owner running it at arm’s length, which means adding back the things that are really owner benefits and subtracting the things you have been getting for free.
A multiple of 1 represents a job rather than a business. There are no barriers to entry, the profit has clear and present risks, and the owner is the business. A multiple of 5 applies where the risk around future earnings is genuinely low: good growth prospects, a management layer that is not the owner, contracted or highly repeatable revenue, and nothing questionable anywhere else.
Most businesses are neither. The honest work of a valuation is deciding where between those poles a particular business sits, and being able to defend that position to the buyer, the buyer’s accountant, the buyer’s solicitor and the buyer’s bank. A number you cannot defend is not a valuation, it is a wish.
Add-backs are legitimate owner benefits that a new owner would not incur. Common ones:
Every add-back has to survive due diligence. An add-back you cannot evidence is worse than no add-back at all, because it makes a buyer question the rest of the file.
Buyers price risk, and the risks that move the number most in this market are predictable:
No, and the difference matters. An appraisal is a broker’s assessment of the range a business should achieve in the current market. A formal valuation is a document prepared to a standard, usually for a bank, a court, a shareholder dispute or the tax position. The sale price is what one specific buyer, with a specific reason for wanting it, actually pays.
In this market the sale price is frequently above the appraisal range, and the reason is almost always competitive tension between two buyers who both want it. That is a process outcome, not a valuation outcome.
Everything the buyer’s independent due diligence team is going to want to see. Historic finalised end-of-year accounts and the profit and loss for the year in progress. Products and services broken down by revenue for recent years. Customer revenue ratios. The lease. Supplier agreements. Customer service agreements. The condition of plant and equipment. Normal stock holding and what of it is obsolete. The organisational structure, and any anomalies in staff employment contracts.
We do that work before the business goes anywhere near a buyer, because the alternative is discovering a problem halfway through due diligence when the buyer finds it first.
Multiples quoted here are indicative ranges for the $1 million to $15 million market, not a guarantee. Every business is assessed on its own numbers and risk profile.
An initial confidential appraisal of a business we may take to market is done at no charge and with no obligation. A formal written valuation prepared for a bank, a court or a shareholder agreement is a separate piece of work with its own fee, because it is prepared to a different standard for a different audience.
You can get to a rough figure by applying a multiple to your normalised earnings, and it is worth doing before any conversation with a broker. Where owner estimates usually go wrong is the risk side rather than the arithmetic: owner dependence and customer concentration are hard to see from the inside, and they are the first two things a buyer prices.
Treat it as current for around six months in a stable market. Earnings move, the lease shortens, a key customer signs or leaves, and interest rates change what buyers can borrow. If more than a year has passed, the number needs revisiting before it goes in front of anyone.
A confidential conversation with one of our brokers, at no charge. You will get a straight answer, including if the answer is to wait.
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