This guide walks through the same steps a broker works through for an appraisal, using a worked example. It's general information to help you plan. If you need a figure for a bank, a court or Inland Revenue, that has to come from a chartered accountant.
Step 1: Gather three years of accounts
Pull together your last three sets of annual financial statements, plus year-to-date figures for the current year. One good year tells a buyer very little. Three years show whether the business is growing, holding or slipping.
While you're at it, dig out your lease, any franchise agreement, a list of plant and equipment, and any contracts with key customers or suppliers. You'll need them later.
Step 2: Adjust the profit to what an owner would earn
Your accounts were prepared to keep tax sensible. A buyer wants to know what the business will pay them. So you rework the profit figure, a process called normalising.
Start with net profit before tax, then:
- Add back what you pay yourself, so every business is compared before the owner's wage
- Add back interest, because the buyer will arrange their own finance
- Add back depreciation and amortisation
- Add back personal costs run through the business, like your car or phone
- Add back genuine one-off costs, such as a settled legal dispute
- Take off a market wage for anyone working in the business unpaid, like a partner doing the books
The result is EBPITDA: earnings before proprietor's wages, interest, tax, depreciation and amortisation. It's the figure most NZ brokers use for owner-operated businesses.
Be strict with add-backs. Every one should be something you could explain to a buyer's accountant with a receipt or a ledger entry. "Cash sales that don't go through the books" isn't an add-back. A buyer won't pay for it, and declaring it causes problems you don't want.
Step 3: Work out maintainable earnings
Buyers pay for earnings they believe will continue. If profit has been steady, an average of the last three years works. If it's been climbing, recent years usually carry more weight.
Here's our worked example. A Tauranga commercial cleaning business has normalised EBPITDA of:
- $132,000 two years ago
- $148,000 last year
- $161,000 this year
Weighting the most recent year three times, last year twice and the oldest once gives maintainable earnings of about $151,800. That figure is a fair reflection of the trend without assuming growth will keep going.
Step 4: Choose a multiple
The multiple reflects risk. A buyer will pay more for earnings that are secure and less for earnings that depend on one person or one contract.
Most small owner-operated businesses in New Zealand sell for a low single-digit multiple of EBPITDA. Where yours lands depends on things like:
- How much of the work depends on you
- Whether revenue is contracted or recurring
- How long the lease runs, with what rights of renewal
- Customer spread, staff stability and the state of the equipment
For the cleaning business, contracted commercial clients and a supervisor who runs the crews would support the middle of the range. At an illustrative multiple of 2.2, that points to roughly $334,000. Industry matters a lot here, and business valuation multiples in NZ shift noticeably between sectors.
Step 5: Check what's included in the price
Small business sales in NZ are usually priced as goodwill plus plant and equipment, with stock added at settlement. Debtors and creditors normally stay with the seller.
For the cleaning business, that $334,000 would typically include the vans, machines and gear. Consumables on hand would be counted and added on the day.
If the business owns a lot of equipment and earns very little, flip the question. What would the plant fetch on its own? That can set a floor under the price.
Step 6: Test it against the market
A number that only works on paper isn't worth much. Ask two questions.
What have similar businesses sold for? Comparable sales are the strongest evidence there is. Listing prices aren't sale prices, so be careful drawing conclusions from what's advertised online.
Does it work for a buyer? Most buyers fund part of the purchase with a bank loan. If they paid your price, could they service the loan and still earn a fair living? If the answer is no, the price is unlikely to hold.
Step 7: Decide what kind of figure you need
Your own estimate is fine for planning. Beyond that, you'll need one of two things.
If you're selling, a broker's appraisal gives you a written opinion of market value, backed by comparable sales and current market conditions. That's a requirement for licensed brokers under the Real Estate Agents Act rules. Ours is free and confidential.
If a third party needs to rely on the figure, such as a bank, the Family Court or Inland Revenue, you need an independent business valuation from a chartered accountant.
Common mistakes owners make
Pricing on turnover. Two businesses with $1 million in sales can have wildly different profits. Buyers price earnings.
Counting the hours you put in. Sweat equity matters to you. A buyer only pays for what the business earns without you working for free.
Using a rule of thumb from a friend. "Cafés go for a year's turnover" or similar shortcuts ignore the lease, the margins and the trend. They're wrong more often than they're right.
Valuing assets at what you paid. Equipment is worth what a buyer would pay for it secondhand, not its purchase price.
Want a quicker starting point?
Our business valuation calculator runs steps 2 to 4 for you and emails an indicative range. When you're ready for a figure you can plan a sale around, book an appraisal with Milan.