"What's it worth?" is the first question almost every owner asks, and the honest answer is: it depends on the buyer, the method, and how well the numbers are presented.
Here's how professional valuations are actually built for New Zealand SMEs — and where owner estimates tend to go wrong.
Method 1: EBITDA multiple (the most common)
For most established businesses with $500k+ of earnings, value is expressed as a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation), adjusted for one-offs and owner-related add-backs.
The multiple depends on:
- Size of earnings — bigger EBITDA usually attracts a higher multiple
- Owner dependency — the more the business runs without you, the higher the multiple
- Recurring revenue — contracts and subscriptions are worth more than one-off jobs
- Customer concentration — one customer above 25% of revenue compresses the multiple
- Industry — professional services trade differently to trades, hospitality, manufacturing or distribution
- Growth trend — three years rising beats three years flat
Multiples for typical NZ SMEs sit in a wide band. A well-run, low-owner-dependency business in the right sector can comfortably double the multiple of an owner-operated equivalent with the same earnings.
Method 2: Seller's Discretionary Earnings (SDE)
For smaller, owner-operated businesses — where the owner is genuinely the engine — value is often expressed as a multiple of SDE. SDE is EBITDA plus a full owner's salary plus owner-related benefits.
SDE multiples are typically lower than EBITDA multiples, because they're applied to a larger base. The result, when calculated honestly, is usually in the same neighbourhood — what changes is the language buyers use.
Method 3: Asset-based
For businesses where the value really does sit in the assets — heavy plant, vehicles, inventory, freehold premises — the valuation starts from the depreciated or market value of those assets, with goodwill added on top if the business is profitable.
For most service and trade businesses, asset-based valuation is a floor, not the answer.
Method 4: Discounted Cash Flow (DCF)
DCF projects future cash flows and discounts them back to a present value. It's the textbook method, but for SMEs it's usually a sanity check rather than the primary tool — the assumptions about growth and discount rate swing the answer far too much to rely on it alone.
DCF earns its keep on larger transactions, businesses with long, contracted revenue streams, and shareholder disputes where rigour matters more than market reality.
Method 5: Market comparables
What have similar businesses actually sold for? This is the discipline that keeps the other methods honest. A multiple isn't a multiple because a textbook says so — it's a multiple because real buyers paid it for similar businesses recently.
A good broker maintains a private view of comparable transactions that a generic valuation calculator can't access.
When you need an AES2 Standard Valuation
For bank funding, shareholder buy-outs, relationship property, estate work and court proceedings, an indicative valuation isn't enough. AES2 (Advisory Engagement Standard No. 2, set by Chartered Accountants Australia and New Zealand) is the formal standard for valuations that need to be defensible — accepted by banks, accountants, lawyers and the courts.
If money or independence is on the line, do it once and do it properly.
The five traps owners fall into
- Anchoring on one big year. Buyers value the trend, not the peak.
- Forgetting the owner's salary. "I take $40k a year" doesn't mean the role is worth $40k a year.
- Counting growth they haven't yet delivered. Buyers pay for proven, not projected.
- Ignoring customer concentration. One customer at 40% of revenue can halve the multiple.
- Confusing turnover with value. A $5m revenue business with 4% margins is usually worth less than a $1.5m revenue business with 25% margins.
What to do next
If you want a no-obligation market appraisal — an indicative range based on real comparable transactions — that's the right starting point. If you need a formal report for a bank, a shareholder or a lawyer, you need an AES2-grade valuation.
Either way, the worst thing you can do is guess.