Factors influencing value
The value of a business depends on many factors, from financial performance to intangible strengths. Key business valuation factors include:
- Personal circumstances, such as the need for a quick sale due to health reasons.
- Tangible assets including property, machinery, equipment, and inventory.
- Intangible assets such as brand reputation, customer goodwill, and growth potential.
- Patents and intellectual property, including copyrights, trademarks, or distribution rights.
- Business track record and cashflow, where a proven history and reliable income streams add strength.
- A loyal customer base adds business value, particularly if customers provide repeat business.
- Key employees add value, since retaining skilled staff increases continuity and reduces risk.
- If the business is easily scalable, providing exponential growth without adding overhead.
Together, these factors shape buyer perception and influence the final price a business can command.
Net asset-based valuation
An asset-based valuation calculates worth by summing total assets and subtracting liabilities. This approach is common where an asset-heavy businesses is more valuable than the on-going profitability, or where future goodwill is variable or uncertain.
It usually just includes tangible assets such as property, machinery, raw materials and stock.
Asset plus goodwill valuation
For many small businesses being sold, goodwill makes up a significant part of value, which can include:
- Strong relationships with customers and suppliers.
- Exclusive access to products or services.
- Recurring revenue that’s easy to maintain.
- Intellectual property protections that give a market advantage.
- A favourable location supported by a long lease.
- Reliable cashflow and minimal debt.
- Loyal, experienced staff who are likely to remain after the sale.
These factors reduce risk for buyers and provide continuity, which is why they are often willing to pay more for a business with strong goodwill, rather than just the next assets.
Earnings multiple valuation
A widely used approach for profitable businesses is the earnings multiple. This method applies a multiplier to EBITDA (earnings before interest, taxes, depreciation, and amortisation) or to net profit.
Multiples vary by industry and market conditions. For example, when Trade Me was sold in 2018, it achieved a multiple of 16.7x EBITDA. By contrast, larger listed companies such as Air New Zealand and Spark tend to sit around 6-7x EBITDA. Smaller businesses may attract just 1-2x multiples, depending on risk and sector outlook.
Revenue multiple valuation
Similar to earnings multiples, a revenue multiple assigns value based on annual sales. This is common in high-growth industries where sales is high but profit may be low, often as the business is reinvesting profit for growth.
For instance, Xero was valued at hundreds of millions while still reporting losses, because revenue was growing strongly and investors expected profitability in future. This method works well for tech startups, SaaS companies, and other fast-growth businesses.
Discounted cashflow (DCF) analysis
DCF calculates value based on projected future cashflow, adjusted for risk. Because money today is worth more than money in the future, cashflow is discounted to present value using a chosen rate.
For example, if a business is forecast to generate $1.5m in year one, $2m in year two, and $2.5m in year three, and a 20% discount rate is applied, those values reduce to $1.2m, $1.6m, and $2m. Combined, the business could be worth $4.8m. This approach is best suited for businesses with steady, predictable cashflow and there are industry examples to test.
Comparable company analysis
This method benchmarks against similar businesses sold in the market or publicly traded companies. Business brokers often hold aggregated data, allowing sellers to compare like for like, similar to how property valuations are assessed.
Comparable analysis is practical because it reflects actual transactions and current industry sentiment.
Rule of thumb valuation
Certain industries have established benchmarks, such as multiples of revenue or profit. Retail, hospitality, and professional services often use standard formulas agreed across the sector.
While not precise, these benchmarks provide a useful starting point when deciding what your business is worth.
Cost of starting method
Instead of someone buying your business, they could start a new one from scratch. The cost for them to do this becomes their yard stick for a valuation of your business. While it factors in infrastructure, equipment, branding, and other set-up costs, it should also include the time to get the business in profit (an amount for monthly working capital).
Liquidation value
Liquidation value is an approach that estimates what a business would generate if its assets were sold quickly. It is most often used in distressed situations or bankruptcy, where time and circumstances limit options.
Key points include:
- Assets are sold under pressure, usually at lower than market value.
- Tangible items such as property, equipment, and stock are the main sources of recovery.
- Intangible assets like brand reputation or goodwill typically add little value in this scenario.
- The total realised is often below fair market value because buyers know the sale is urgent.
Liquidation value is considered the worst-case scenario, but it can serve as a useful baseline when planning for exit.
Get professional help
Business valuation is rarely straightforward, so it’s important to seek expert advice. Different valuation methods can produce varying results depending on your industry, financial health, and circumstances. Engaging professionals – such as valuers, accountants, or M&A specialists – helps ensure objectivity and removes emotional bias from the process. Remember, the valuation reflects the value of the business itself, not the personal effort or years of dedication the owner has invested.
Business brokers can also provide guidance and market comparisons. In New Zealand, you can explore firms such as NZ Business Brokers, ABC Business Sales, and LINK Business Brokers.
Next steps
- Identify which business valuation methods are most relevant to your industry.
- Assess both tangible and intangible factors, from assets to brand value.
- Work with advisers to prepare accurate financial records.
- Consider engaging a professional valuer or business broker.
