For most business owners, “What’s my business worth?” is one of the most important, and least understood questions. The answer isn’t as simple as multiplying profit by a number you heard from someone at a networking event.

In reality, there are several recognised valuation methods. Each one has different strengths, assumptions, and uses. The method for valuing your business depends on three key factors: what is being valued, why it's valued, and how your business makes returns.

At RJD Advisory, we believe that knowing how value is determined helps business owners improve it more effectively. Here’s a clear look at the main valuation methods and when each is used.

1. The Earnings-Based Approach

This is the most common valuation method for small and medium-sized businesses in Australia. It’s based on the principle that a business is worth the future cash flows it can generate for its owners.

(a) Capitalisation of Future Maintainable Earnings (FME)

This approach examines your normalised profit, usually EBITDA (earnings before interest, tax, depreciation, and amortisation). It then uses a capitalisation multiple that considers risk, growth potential, and industry conditions.

Example: If a business has maintainable EBITDA of $500,000 and a multiple of 3.5, its indicative value is $1.75 million.

The multiple isn’t random. It comes from looking at similar business sales, industry benchmarks, and the perceived risk of your business. Key factors, such as reliance on major customers, recurring revenue, and strong management, all play a role.

When it’s used:

• Established, profitable businesses

• Valuations for sale, purchase, or succession planning

(b) Discounted Cash Flow (DCF)

The DCF method projects future cash flows (usually over 3–5 years) and “discounts” them back to their present value using a rate that reflects risk and the cost of capital.

This method is particularly useful when earnings are expected to change significantly, for example, high-growth start-ups or businesses with new product lines.

When it’s used:

• High-growth businesses

• Forecasting and investment valuations

• Early-stage companies with strong forward potential

Key takeaway: DCF provides a forward-looking view, but it relies heavily on the quality of assumptions, if forecasts are overly optimistic or uncertain, results can vary significantly.

2. The Asset-Based Approach

Sometimes a business’s value is better represented by the value of its assets, not its earnings. This approach looks at net tangible assets. These include property, equipment, stock, and cash, minus any liabilities.

(a) Net Asset Value (NAV)

NAV is calculated by taking the fair market value of all assets and then subtracting liabilities. It’s straight-forward and transparent but doesn’t capture the true earnings potential of a profitable, trading business.

When it’s used:

• Capital-intensive industries (e.g. manufacturing, transport)

• Businesses with limited profitability or those being wound up

• Holding entities or investment companies

(b) Replacement or Reproduction Cost

In rare cases, a valuer might find out how much it would cost to replace or reproduce the business's assets today. This usually happens with specialised equipment or infrastructure.

When it’s used:

• Insurance purposes

• Infrastructure or asset-heavy valuations

3. The Market-Based Approach

This method compares your business to similar businesses that have recently sold, or to publicly listed peers.

(a) Guideline Company Method

Valuers analyse transactions and listed companies in the same industry to determine pricing multiples (e.g. price-to-earnings, price-to-revenue).

The valuer then adjusts those multiples to reflect your business’s size, risk, and growth outlook.

When it’s used:

• Common in professional services, retail, and hospitality

• Market valuations for M&A and investor negotiations

Challenge: Private sales data isn’t always public. So, professional databases and industry knowledge are key for accuracy.

4. The Industry-Specific Rule of Thumb

Many industries, like accounting, dental clinics, and real estate agencies, use simple formulas. For example, they might use “one times annual revenue” or “a percentage of recurring fees.”

These rules can serve as a rough starting point. However, they often miss variations in profitability, systems, or client concentration.

At RJD Advisory, we often use these rules as a sense check, not a conclusion.

5. So, Which Method Applies to Your Business?

That depends on your purpose and situation. In practice, professional valuers often apply multiple methods and reconcile the results. This ensures the final figure is balanced, defensible, and reflects both financial performance and commercial reality.

6. The Importance of Independence

An independent valuation adds credibility, whether you're selling, investing, or planning for succession. Buyers, banks, investors, and courts trust valuations from experienced, qualified professionals. These experts have no personal stake in the outcome.

At RJD Advisory, we take an objective approach to every valuation. We blend financial analysis with practical business insights. Our goal is to tell you what your business is worth now and show you how to boost that value over time.

Key Takeaways

• There isn’t one “correct” way to value a business. The best method depends on your business’s purpose and nature.

• Earnings-based methods (capitalisation or DCF) are most common for profitable SMEs.

• Asset and market approaches confirm results, especially when profitability or data transparency varies.

• Independence, context, and professional judgement are essential for credibility.

How We Can Help

RJD Advisory can provide a clear, independent assessment of your business’s worth. We also offer guidance on how to boost its value before a sale or restructure. We provide independent valuations for business owners, accountants, and legal professionals across Australia.

📞 Book a consultation today to explore how we can support your next step.