Business owners often ask, “What multiple is my business worth?” That question starts too late in the analysis. A credible valuation first defines what is being valued, why, at what date, under which assumptions, and using what evidence.
The International Valuation Standards Council describes International Valuation Standards as a guide intended to support consistency, transparency, and confidence in valuations. A useful valuation should therefore make its scope, basis, methods, assumptions, inputs, and limitations understandable.
Valuation, price, and seller proceeds are different
| Term | What it means |
|---|---|
| Indicative value | An estimate based on selected methods, assumptions, and available information. |
| Negotiated price | The amount buyer and seller agree for the shares or assets, subject to the transaction documents. |
| Enterprise value | A value concept for the operating business before applying the agreed treatment of cash, debt, and other equity adjustments. |
| Equity value | The value attributable to shareholders after the relevant cash, debt, and agreed adjustments are applied. |
| Seller proceeds | What the seller receives, when it is received, and on what conditions, before or after applicable costs and taxes. |
Two offers with the same headline price can have different economic value. One may be paid at settlement. Another may include an earn-out, escrow, vendor finance, rollover equity, holdback, or conditions that transfer risk back to the seller.
Step 1: Define what is being valued
The subject might be shares in a company, selected business assets, the operating business on a cash-free and debt-free basis, a minority interest, or another interest. The answer affects the information, adjustments, tax treatment, and legal analysis.
Inland Revenue states that asset and share sales have different tax consequences. For an asset sale, the parties identify the assets being transferred and agree how the purchase price is allocated. That allocation generally affects both parties' tax positions. A share sale transfers shares in the company that owns the business, with different consequences.
Review the dedicated NZ asset-sale versus share-sale guide with your professional advisers before agreeing structure or allocation.
Step 2: Establish maintainable earnings or cash flow
Reported profit is a historical accounting result. Valuation analysis may adjust it to estimate earnings or cash flow that a market participant could reasonably expect the business to maintain. Every adjustment needs evidence.
Common areas examined
- owner remuneration compared with the market cost of replacement management
- personal or non-business expenses recorded through the company
- genuinely non-recurring income and costs
- related-party rent, charges, loans, or transactions
- changes in accounting policy or revenue recognition
- customer losses, contract wins, backlog, and post-balance-date trading
- maintenance capital expenditure and required replacement spending
- working-capital requirements and seasonality
- underinvestment in people, compliance, systems, or maintenance
An “add-back” is not valid merely because it appears in a seller schedule. The valuer or buyer will test whether the item is supported, non-recurring, and unnecessary for the business under new ownership.
Step 3: Select valuation approaches that fit the business
Valuers may use one or more approaches and reconcile the results. The method should fit the purpose, evidence, business model, and reliability of the inputs.
Income approach
An income approach estimates value from expected future earnings or cash flow. A capitalisation method may be used where maintainable performance is sufficiently stable. A discounted cash-flow method may be used where explicit forecasts, investment requirements, and changing cash flows need separate treatment.
The result can be highly sensitive to forecasts, margins, capital expenditure, working capital, long-term growth, and the selected risk or discount rate. A detailed spreadsheet does not make uncertain assumptions certain.
Market approach
A market approach compares the business with relevant transactions or public companies, then adjusts for differences. For private New Zealand SMEs, genuinely comparable transaction data can be limited because terms are often confidential and businesses differ by scale, concentration, margins, growth, assets, management, risk, and transaction date.
A quoted multiple without the underlying definition is weak evidence. Ask what earnings measure, period, adjustments, transaction structure, working-capital basis, debt treatment, and company set produced it.
Asset approach
An asset approach considers the value of assets less liabilities. It may be especially relevant for asset-intensive businesses, holding entities, or businesses where earnings do not adequately support a higher going-concern value. Book value, tax value, replacement cost, and market value are not interchangeable.
Step 4: Assess the quality and risk of earnings
The same level of current earnings can support different valuations because the evidence and risks differ.
- Customer concentration: contract terms, termination rights, retention, and dependence on individual relationships.
- Revenue quality: recurring, contracted, repeat, project, and spot revenue need separate analysis.
- Management depth: decision-making, technical approvals, customer ownership, and succession beyond the founder.
- Supplier dependence: exclusivity, change-of-control rights, supply continuity, and alternative sources.
- Regulatory position: licences, permits, compliance history, qualified staff, and remediation needs.
- Asset requirements: maintenance condition, replacement cycle, leased versus owned equipment, and deferred expenditure.
- Growth evidence: capacity, pipeline, conversion, customer demand, required investment, and execution risk.
- Financial controls: reliable reporting, reconciliations, inventory controls, and visibility over margins and cash.
These factors do not produce an automatic premium or discount. They influence the assumptions, risk assessment, maintainable earnings, investment needs, and negotiating position.
Step 5: Bridge enterprise value to equity value
An enterprise-value indication is not automatically the cheque paid to shareholders. The transaction documents define the bridge. Items can include:
- cash retained or delivered
- bank debt and other debt-like items
- shareholder loans
- normal working-capital requirements and completion adjustments
- surplus or excluded assets
- unpaid tax, provisions, claims, or contingent liabilities
- transaction costs and any applicable tax
Terms such as “cash free, debt free” and “normal working capital” need precise definitions. The parties should agree the accounting policies, reference period, target, completion accounts, dispute process, and treatment of unusual items.
Step 6: Evaluate how and when the price is paid
Consideration can be fixed, deferred, contingent, financed, retained in escrow, or exchanged for equity in another entity. Assess each component separately.
- cash payable at settlement
- earn-out metrics, period, control rights, and accounting policies
- vendor finance terms, security, priority, and repayment risk
- escrow or holdback amount, claims process, and release date
- rollover equity rights, dilution, governance, liquidity, and exit assumptions
- warranties, indemnities, liability caps, and survival periods
A higher contingent headline can be less attractive than a lower amount with greater certainty. Compare the full risk-adjusted package with legal, tax, accounting, and financial advice.
For where valuation, offers, due diligence, agreements, and completion fit in sequence, review the NZ business sale process and the seller due-diligence checklist.
Why public SME multiples are unreliable
There is no dependable public multiple for every New Zealand SME in a sector. Published ranges often omit the company identity, earnings definition, size, date, growth, concentration, asset requirements, working capital, debt, deal structure, and payment terms.
A multiple can be a shorthand output of an analysis, but it should not replace the analysis. If someone provides a range, ask:
- What exactly is the numerator: enterprise value, equity value, or transaction consideration?
- What exactly is the denominator: EBIT, EBITDA, SDE, revenue, or another measure?
- Which period and normalisation adjustments were used?
- What comparable evidence supports the range?
- How were debt, cash, working capital, assets, and contingent payments treated?
What to give an independent valuer
- the valuation purpose, date, subject interest, and intended users
- reliable historical financial statements and current management accounts
- budgets and forecasts with assumptions and prior forecast accuracy
- customer, contract, supplier, product, and margin information
- organisation chart, management responsibilities, and owner dependencies
- asset register, leases, debt, capital expenditure, and working-capital data
- material legal, tax, regulatory, employment, and insurance matters
- evidence supporting proposed earnings adjustments
Ask the valuer to state the standard followed, basis of value, scope, information relied upon, methods, assumptions, sensitivities, limitations, and whether the work is independent.