How Much Is My Business Worth? NZ Business Valuation Explained
Price and value are different
An asking price is what the owner hopes to receive. Market value reflects what an informed buyer may pay after considering earnings, assets, risk and available alternatives. The final sale price can also be influenced by finance, payment terms, lease conditions and how quickly the owner wants to sell.
A valuation is therefore more than applying a multiple to revenue. Two businesses with the same sales can have very different values if one produces stable profit with a capable team while the other depends heavily on the owner and one major customer.
Earnings based valuation
Many small businesses are assessed using maintainable earnings. An accountant starts with reported profit and considers adjustments for owner wages, personal expenses, one-off costs and income that may not continue. The objective is to estimate the economic return available to a typical new owner.
A multiple may then be applied to those earnings. The multiple is not universal. It can move with industry, size, growth, risk, customer concentration, management strength, lease security and the quality of the records. A higher profit does not automatically produce a higher multiple.
Asset based valuation
An asset approach considers tangible and identifiable assets such as equipment, vehicles, stock and property, less relevant liabilities. It can be useful for asset-heavy businesses, but book value may differ from current market value or replacement cost.
Assets do not automatically explain goodwill. A profitable service business may own little equipment but have valuable contracts, systems, staff and customer relationships. An underperforming business may own expensive machinery but produce a weak return.
What increases value
Buyers generally place more confidence in earnings that are documented, repeatable and transferable. Long-term customer relationships, diversified income, written contracts, capable staff and clear systems can support value. A secure lease is often important when the location contributes to sales.
Good records also matter. When financial statements, tax records, payroll and operating information are complete, a buyer can assess the business more quickly and with fewer assumptions.
- Consistent maintainable earnings
- Low reliance on one owner or customer
- Transferable contracts and licences
- Documented systems
- Stable trained staff
- Well maintained assets and premises
What can reduce value
Short leases, overdue maintenance, informal customer arrangements and unclear financial adjustments create uncertainty. Buyers may also discount earnings when the owner works unusually long hours or provides specialist work that would be expensive to replace.
A valuation should be completed by a suitably qualified professional for the specific transaction. The Business Board can help an owner advertise and reach buyers, but it does not provide valuations or transaction advice.
Preparing for a professional valuation
Before meeting a valuer or accountant, organise information that explains both the financial result and how the operation works. Include recent accounts, current trading figures, an asset schedule, the premises lease, major contracts and a summary of the owner's role. Explain unusual events rather than leaving the adviser to guess.
Ask what valuation date, earnings measure and market evidence have been used. A valuation prepared for a family transfer, finance application or open-market sale may answer a different question. Keep the valuation current when trading, customer concentration or market conditions change materially.
- Confirm the purpose and valuation date
- Reconcile owner adjustments
- Identify assets and liabilities
- Document the owner's hours and duties
- List major customers and contracts
- Explain abnormal income or costs