Is Your Business Worth What You Think It Is?

The owner of a Melbourne distribution business, turning over about $6 million, told me early in our first meeting that it was worth $5 million. He had a reason. Someone he knew in the same industry had reportedly sold for about that, and his business was, if anything, a little bigger.

I didn't argue with the number. I asked how he'd arrived at it.

His answer covered turnover, the stock and plant he'd invested in and twenty years of hard work. All fair starting points for an owner. None of them is where a buyer starts.

The number in your head is already doing a job

Most owners carry a figure, whether or not anyone has ever assessed it. That figure quietly does a lot of work. It shapes when you plan to stop, how much more you're prepared to invest, how you respond when a competitor calls and what you expect to live on afterwards.

The risk is that an assumed value starts to feel like a fact. If it's higher than the market will support, you usually find out at the worst moment, when you're ready to go and an offer comes in well short. If it's lower, you may be making cautious decisions you don't need to make.

The question isn't really what your business is worth. It's what a buyer believes it will earn without you, and how confident they are in that belief.

Start where a buyer starts: earnings that will continue

For the distributor, we set turnover aside and worked from profit. The reported figure was about $900,000. Then we went through it the way a buyer's accountant would, line by line.

Some costs wouldn't recur. A one-off legal dispute had cost around $60,000 that year, and that was a fair adjustment upwards. Others went the other way. He paid himself a modest salary, yet he personally ran the three largest customer relationships and the key supplier terms. A buyer would need to pay someone properly to do that, and on our estimate it would cost about $100,000 a year more than he was drawing.

Importantly, the adjustments that reduce earnings are the ones owners tend to leave out. Buyers never do.

We then asked whether those earnings would last:

•   How much revenue came from the largest customers? One accounted for close to 30% of sales.

•   Were margins holding, or being competed away?

•   Could the team run the business for a month without him?

Why someone else's sale is a poor guide

The business he was comparing himself with may well have sold for what he'd heard. But he didn't know its earnings, its customer mix, how much of the price was stock or what the terms were. A headline price relayed second-hand tells you very little about your own business.

Business valuation is not simply the application of a multiple to profit. Two businesses with similar profits can attract very different offers, because one has spread its customers, documented its systems and built a team, and the other still depends on its owner.

By the end of the meeting he had a range rather than a single number, and a short list of what was holding it down. The customer concentration and his own role in the key relationships were both things he could work on, given time.

A starting estimate is worth having well before a sale

You don't need to be ready to sell to benefit from an indicative value. Knowing roughly where you stand lets you test whether your plans for retirement hold up, and shows you where effort over the next few years would add the most.

If you haven't looked at this recently, my Business Value Calculator is a sensible first step. It uses the earnings and industry information you enter to give an indicative range. It's a starting point rather than a valuation, and it can't see the strengths and risks particular to your business. That's where the useful conversation begins.

The most valuable question is the one you ask after you see the result: what would need to change for my business to be worth more?

If it would be useful, I'm happy to have a confidential conversation about where your business sits.

About the author: Greg Johnson is a CPA, Certified Exit Planning Advisor, Licensed Business Broker and Registered Business Valuer, and Founder and Managing Partner of Ascend Partners. Client examples are composites, with details changed to protect confidentiality. This article was prepared with AI support from my own experience and direction; the observations are mine.