Before You Buy or Sell a Business, Someone Needs to Check What the Numbers Aren't Saying.
How a Business Is Valued
There is no single formula. Common approaches include:
- Earnings-based. The business's sustainable profit is multiplied by a figure that reflects risk and growth prospects.
- Cash flow-based. Future cash flows are forecast and discounted to a present value.
- Asset-based. The value of the net assets, often used for asset-heavy or struggling businesses.
In practice, valuers compare methods and test the result against how similar businesses sell. The answer depends heavily on what profit is counted, which is why the next step matters.
Normalising the Earnings
Reported profit is rarely the profit a buyer will actually get. Valuers adjust for items such as:
- The owner's wage, if it is above or below what a replacement manager would cost
- Personal or one-off expenses run through the business
- Related-party rent or fees not priced at market rates
- Unusual income or costs that will not repeat
Each adjustment needs evidence. Undocumented add-backs get discounted or ignored.
What Buyers Check in Due Diligence
Financial. Quality and consistency of earnings, margins, working capital needs and the reliability of the books.
Tax and compliance. BAS, PAYG, super and income tax lodgments up to date, with no outstanding debts or disputes.
Employees. Award compliance, accrued leave and other entitlements, and any dependence on key people.
Customers and contracts. Concentration on a few clients, contract terms, and whether contracts transfer on sale.
Assets and liabilities. Ownership of equipment and premises, lease terms, loans, and contingent liabilities.
Legal and IP. Ownership of brand, software and key intellectual property.
How Sellers Can Prepare
- Get the books clean and reconciled well before you go to market.
- Document add-backs and one-off items with evidence.
- Reduce dependence on yourself by documenting processes and building the team.
- Spread revenue across more clients where you can.
- Fix tax and compliance gaps in advance, since buyers will find them.
- Think about structure and timing early, as they affect your tax outcome.
How Buyers Can Protect Themselves
Test the earnings, not just the headline. Confirm what is included in the price. Check for liabilities that survive the sale. Understand whether you are buying shares or assets, since the risk and tax result differ.
Restructuring Beforehand
Some businesses restructure before a sale or investment round. This can have tax and stamp duty consequences, so it should be planned, not rushed, and timed separately from the sale itself.
RBizz provides business valuation, due diligence support and restructuring advice for buyers, sellers and owners planning an exit. Book a free discovery call to talk through your situation.
