How we calculate the value of a businessValuations and market appraisals for small to medium-sized businesses

Why obtain a business valuation or market appraisal?

To get a realistic view of a business’ value for sale or acquisition, transfer, succession, dispute and settlement, or

planning purposes, and is based on:

Market conditions Comparable salesBusiness performance

*The scope of the valuation of appraisal will vary depending on the purpose

How are business values are determined?

For both valuations and market appraisals, a range of internal and external health factors are considered

Business maintainable

earnings (BME)

Size and strength of customer database

WIP and longevity of

existing contracts

Length of premises

leases

Value of stock,

fixtures, fittings, plant, equipment

Point of difference and

competitive dynamics

Market sector industry trends

Business Maintainable EarningsWhat is BME, why is it so important and how is it calculated?

What are business maintainable earnings and why are they so important?

BME is the most important concept the market will consider

when considering the worth of a business

BME reflects the ability of the business to generate earnings

into the future

&

• interest • depreciation • abnormal or

non-business expenses not related to the business

• owners’ wages (including a reasonable market-related amount for owners working in the business)

• non-business income • windfalls • other abnormal income

Revenue – cost of goods

sold =

Gross Profit

Operating, finance and

non-cash expenses =

Net Profit before

Taxation

lessless

How to calculate BME

= business maintainable earnings

plus

Note: This calculation will vary depending on every individual business

BME are critical to determine the goodwill associated with a business.

The higher the probability that the level of BME will extend beyond the first year of trading without the current owner, the greater likelihood that the business valuation will recognise this.

The market will often determine business price based on a multiple of BME and other factors.

Imagine you’re selling your business for $1m and I’ve assessed it as having an average BME, looking forward, of about $300,000 a year.

If I buy your business it’s going to take me three and a bit years to get my money back.

That means I’m paying a multiple of BME of about 3.3x.

Multiple of BME is the term for how many years or months a purchaser is prepared to wait before they recoup the value they paid the outgoing business owner.

As a general rule, in the small to medium-sized business market, purchasers are looking from one, to four and a half years, to recover the money they’ve invested. 

Valuation vs Market Appraisal

Market Appraisal Indicative business value range

for decision support purposes Assessment of business

performance Considerations of market

conditions and comparable sales Documented summary providing

marketing price range, advice and decision support.

Factors adding and detracting to value.

Valuation Sworn valuation, for various purposes

depending on scope of valuation, including:• Mortgage security purposes• Business exit, business sale• Family and business succession• Stamp duty and structuring purposes• Family Court proceedings• Shareholder and other transfer

purposes Detailed evaluation of business and

financial performance Competitive position versus others and

industry dynamics Comparable sales, multiple of earnings,

discounted cash flow and return on investment assessments (depending on specific scope and business attributes)

Specific valuation and detailed report, plus related decision-support recommendations (as per the valuation scope).

Interested in seeking a valuation or market appraisal for your business?

Scott Bell General ManagerMobile: 0412 203 160Email: scott@jpabusiness.com.au

Visit www.jpabusiness.com.au/contactusPhone +61 2 6360 0360Email info@jpabusiness.com.au

James Price Managing DirectorMobile: 0439 601 207Email: james@jpabusiness.com.au