To know what a business is worth before you buy, check the seller's figures against tax returns and bank records, test every add-back, and ask how much of the profit depends on the current owner. An independent valuation then gives you your own reasoned figure, separate from the asking price, to support your offer.
How do I work out what a business is worth before buying?
Start with the business's real, provable profit, then ask how likely that profit is to continue once you own it. The value comes from that future profit and the risks around it, not from the asking price.
The Australian Government's guide to buying an existing business says buyers should collect and check the financial information themselves. It also says to work out the business's current value before committing.
In practice, that means four steps:
- Get three to five years of financial statements and tax returns where available, and at least two or three.
- Check the seller's profit figure against those records.
- Test each adjustment the seller has made.
- Weigh the risks, then compare your figure with the asking price.
How do I check the seller's numbers and add-backs?
Match the profit in the sales information to the tax returns and bank records, then ask for proof of every add-back. If a figure cannot be traced to a record, treat it with caution.
Sellers often present an adjusted profit. That is the accounting profit plus add-backs: costs they say a new owner will not have. Some are fair. Others are optimistic.
| Add-back claimed | Question to ask |
|---|---|
| Owner's wages | Who will do the owner's work, and what will that person cost? |
| One-off expense | Did it really happen once, or does something similar happen most years? |
| Private expenses | Is there an invoice, and was it truly not a business cost? |
| Family members on the payroll | Will that work still need doing, and at what cost? |
| Cash sales not in the accounts | Unrecorded income cannot be proved, so it should not be relied on |
The owner's wage is the big one. If the seller runs the business full time and adds back all of their pay, someone still needs to do that job. Learn how this affects profit in SDE vs EBITDA.
What are the main risks to look for?
Watch for three main risks: profit that depends on the seller personally, a few customers making up most of the sales, and a lease or key contract that may not carry over. Each one can reduce what the business is worth to you.
Other risks to check:
- Falling sales or margins in the most recent year.
- Staff who may leave when the owner does.
- Old or poorly kept equipment that will need replacing.
- Stock that is slow moving or out of date.
- Licences, permits or supplier terms that do not transfer automatically.
- Debts or obligations that come with the business, depending on how the deal is structured.
The government guide also suggests talking to existing customers, employees and neighbouring businesses to understand how the business is really going.
What is due diligence, and who does it?
Due diligence is the detailed check of a business before you sign. It covers the financial records, contracts, leases, staff, legal issues and anything else that affects what you are buying.
Your accountant should review the financial and tax side. Your lawyer should review the contract of sale, the lease and other legal documents. A valuation does not replace either of them.
A valuation and due diligence work together. Due diligence can uncover facts that change the valuation, such as a lease ending or a customer leaving.
When does an independent valuation help?
An independent valuation helps when you need your own figure, based on the evidence, to set or support an offer. It is independent of the seller and the broker, and the fee does not depend on the value.
It is most useful when:
- The asking price relies heavily on add-backs.
- You are unsure whether a broker's price is realistic.
- You want a reasoned basis for negotiating.
- A lender, investor or partner wants to see how you reached your offer.
Which Valuo report fits a purchase?
If the report is only for your own decision, the Business Value Report fits. If anyone else will rely on it, choose the Professional Valuation Report, which is signed by the valuer responsible.
| Annual revenue of the business | Business Value Report | Professional Valuation Report |
|---|---|---|
| Under $1 million | $995 + GST | $1,495 + GST |
| $1 million to under $2 million | $1,495 + GST | $1,995 + GST |
| $2 million to under $5 million | $2,495 + GST | $2,995 + GST |
| $5 million to under $10 million | $3,495 + GST | $3,995 + GST |
For revenue of $10 million or more, you receive a fixed fee quoted before any work starts. You will need the seller's financial statements to begin.
What should I do next?
Get your fixed fee, then answer a few short questions so we can confirm the right report for your purchase.
- Get your fixed fee
- See all pricing and how it works
Buying a medical, dental, pharmacy or allied health practice? Medival specialises in healthcare practices. Buying an early-stage or pre-profit company? Try Start-Up Valuations. For a purchase between related parties, or one tied to a restructure or tax planning, talk to Oliver Group.
Questions
Can I trust the seller's profit figures?
Treat them as a starting point to check, not a fact. Compare them with tax returns, bank statements and business activity statements, and ask for evidence for every adjustment the seller has made.
What is an add-back?
An add-back is a cost the seller adds back to profit because they say it will not continue under a new owner, such as private expenses or a one-off bill. Each one should have a clear reason and a record, such as an invoice.
Is the asking price what the business is worth?
Not necessarily. The asking price is what the seller hopes to get. An independent valuation gives you a figure based on the evidence, which you can compare with the asking price before you make an offer.
Does a valuation replace due diligence?
No. A valuation looks at what the business is worth. Due diligence checks the legal, financial and operational facts behind the deal. Your accountant and lawyer should handle due diligence and the contract.
Which Valuo report should I use when buying?
The Business Value Report suits a first look at a business you may buy, for your own decision. If a lender, investor, the seller or another party will read the report, choose the Professional Valuation Report.
General educational information, not advice. Examples are hypothetical and do not value a real business. The right treatment depends on the purpose, the evidence and the agreed scope.