Most business owners search for a formula. A multiple of profit, a percentage of revenue, a number they can plug their financials into and arrive at a figure. The reality is more nuanced than that, and understanding how buyers actually think about value is one of the most useful things you can do before going to market.
The three things every buyer weighs up
Whether they articulate it this way or not, every buyer looking at a business is asking three questions. The answers to those three questions determine what they are willing to pay.
Risk
How likely is this business to keep performing after I buy it? What could go wrong, and how serious would it be? The lower the risk, the more a buyer is prepared to pay.
Reward
What return will I get on my investment, and what is the upside potential? A business generating strong, consistent profit relative to its asking price is more attractive than one that requires a leap of faith.
Effort
How much time and work does this business require from its owner? A business that runs with the owner working reasonable hours is worth more than one that demands sixty-hour weeks with no ability to step away.
These three factors sit behind every valuation conversation, even when neither party names them explicitly. A business that scores well on all three: low risk, strong reward, manageable effort. That business will attract the highest offers. A business that scores poorly on any one of them will see that reflected in either the price or the pool of interested buyers.
What drives risk in an SME
Risk takes several forms in a small business sale. The most common are:
- Owner dependency. If the business cannot function without the current owner, buyers face the risk that performance drops the moment they take over. The more embedded the owner is in day-to-day operations, client relationships, and specialist knowledge, the higher this risk.
- Client concentration. If a large share of revenue comes from one or two clients, the business is exposed to a significant shock if either relationship does not transfer. Buyers price this risk in.
- Supply risk. Businesses that rely on a single supplier, an exclusive arrangement, or a relationship that may not survive a change of ownership carry supply risk that buyers will factor into their assessment.
- Cashflow risk. Businesses with lumpy, unpredictable, or seasonal revenue are harder to finance and harder to plan around. Consistent, recurring revenue is rewarded with higher valuations.
- Key staff risk. If one or two staff members carry critical knowledge or relationships, their departure after a sale is a genuine risk. Buyers will consider how embedded those people are and how likely they are to stay.
What drives reward
Reward is primarily about the return on investment relative to the asking price, but also about the trajectory of the business. A business growing at 15% per year is worth more than an identical business that has been flat for three years, even if the current profit figures are the same. Buyers are paying for future earnings potential, and a positive trend signals that the future looks better than the present.
What drives effort
The effort a business demands from its owner has a direct impact on value. A fully managed business, one with capable staff, clear systems, and an owner who works in the business by choice rather than necessity, attracts the highest multiples. A well-systemised business where the owner works part-time, has genuine flexibility, and can take holidays is considerably more valuable than one where the owner is trapped working sixty hours a week and cannot leave.
This is one of the most actionable levers a vendor has before going to market. Reducing your own involvement in the day-to-day, documenting processes, and empowering your team does not just make the business easier to run. It makes it worth more.
The components of a business sale price
When a business is sold, the purchase price typically comprises three types of value. Understanding what falls into each category helps you understand how your business will be assessed.
| Asset type | What it includes | How it is valued |
|---|---|---|
| Tangible assets | Plant and equipment, vehicles, machinery, tools, fitouts, office furniture, and any capital assets on the balance sheet | Typically at current market or depreciated book value, depending on condition and age |
| Stock | Physical inventory held for sale | At cost price (what you paid for it), not at the price you sell it for. Counted by stocktake on settlement day |
| Goodwill and intangibles | Trading name, website, trademarks, systems and processes, staff and client relationships, pipeline of work, and everything else that makes the business operate and generate income | Derived from an earnings multiple applied to the business's adjusted profit. This is often the largest component of the price |
For most service businesses, goodwill makes up the majority of the sale price. For asset-heavy businesses (manufacturing, plant hire, transport), tangible assets may represent a significant portion. Understanding which category drives most of the value in your business helps you focus your preparation efforts accordingly.
It is also worth understanding what is not included in a typical NZ business sale. Almost all SME sales in New Zealand are asset sales rather than share sales. The buyer acquires the tangible assets, stock, and goodwill into a new company. The existing company, along with its debts, liabilities, accounts receivable, and cash in the bank, remains with the vendor. The buyer starts fresh with a new entity, trading under the same name. This is one reason buyers do not need to worry about inheriting the business's historical debts or IRD obligations. Read more about asset sales vs share sales.
Understanding goodwill
Goodwill is one of the most misunderstood concepts in a business sale. Vendors often underestimate it. Buyers often struggle to articulate what they are paying for. In simple terms, goodwill is the value of everything in the business beyond its physical assets: the reason the business makes money, rather than the tools it uses to do so.
Personal goodwill vs business goodwill
Not all goodwill is equal, and this distinction matters significantly in a sale.
Personal goodwill is attached to the current owner rather than the business itself. It includes the owner's personal relationships with key clients, specialist knowledge built up over years, individual reputation in the industry, and any value that would leave with the owner when they sell. Personal goodwill is harder to transfer and is therefore less valuable in a sale context. A buyer paying for goodwill that walks out the door with the vendor is taking a real risk.
Business goodwill is everything not tied to the owner personally. It includes knowledge that is shared across the team and embedded in documented systems and processes, client relationships that are maintained through the business brand rather than personal connection, staff with their own relationships and expertise, and a reputation that belongs to the trading name rather than the individual. Business goodwill transfers with the business. It is, from a buyer's perspective, what they are actually buying.
The more you can shift goodwill from personal to business, by documenting processes, building team capability, and ensuring client relationships are not solely dependent on you, the more transferable and therefore more valuable your business becomes.
A practical example: Two businesses in the same industry, both generating the same profit. In Business A, the owner personally knows every key client, handles all quoting, and is the main reason clients stay. In Business B, the owner has a capable team, documented processes, and clients who deal primarily with the business rather than the individual. Business B will sell for a higher multiple, because its goodwill is transferable. Business A requires a longer handover, carries more transition risk, and will likely achieve a lower price to compensate.
How earnings multiples work
For most SMEs in New Zealand, the goodwill component of the price is calculated by applying a multiple to the business's SDE. The multiple reflects the market's collective assessment of risk, reward, and effort.
The earnings figure used is typically Seller's Discretionary Earnings (SDE). Understanding what that means, and how it differs from the net profit figure on your accounts, is one of the most practically useful things a vendor can know before going to market.
Net profit, EBITDA, and SDE (EBIPTDA)
Net profit is what appears at the bottom of your profit and loss statement after all expenses, including your own salary, interest, tax, and depreciation.
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) strips out financing costs and non-cash accounting adjustments to give a cleaner view of operating cash generation. It is the standard measure for larger businesses and is useful for comparing businesses with different financing structures. For many small business owners, this figure still understates the true earnings of the business, because the owner pays themselves differently to the market rate, or runs some personal expenses through the company.
SDE (Seller's Discretionary Earnings), also known as EBIPTDA (Earnings Before Interest, Proprietors' income, Tax, Depreciation and Amortisation), takes EBITDA further by also adding back the owner's salary and any legitimate personal expenses run through the business, known as add-backs. The two terms are used interchangeably in NZ business sales. SDE or EBIPTDA represents the total cash benefit available to a single owner-operator and is the standard earnings measure for SME valuations in New Zealand.
The multiple is applied to SDE, not to net profit. This is why a business with a modest net profit can sell for a significantly higher price than the raw profit figure might suggest. Your accountant and broker will work through what the SDE calculation looks like for your business before going to market.
A simple example: A business shows $80,000 net profit, but the owner pays themselves a $120,000 salary. The SDE (or EBIPTDA) is $200,000. At a 2x multiple, the goodwill component is $400,000. A buyer paying themselves a market-rate salary from the same business would show a very different net profit figure to the current owner, which is exactly why net profit alone is not the right basis for valuation.
Multiples for SMEs in New Zealand typically range from one to four times adjusted SDE, with most businesses sitting between two and three. A business at the higher end of that range tends to have strong, consistent profit growth, low owner dependency, recurring revenue, a capable team, and clear systems. A business at the lower end tends to have the inverse of those characteristics.
Industry also plays a role. Some sectors attract consistently higher multiples because of their stability, growth profile, or scalability. Others carry structural risks that the market prices in. An experienced broker with current market data will give you the most accurate picture of where your business sits.
Common questions about business valuation
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