Business Valuations Based On Net Profit

Business valuations based on net profit

Most owner-run businesses in Australia are valued on net profit, but not the figure in your tax return. Brokers start with your net profit, add back costs a new owner would not carry, then multiply that adjusted net profit by a multiple that reflects risk. Stock is usually added on top. This guide explains each step, with a worked example.

In short

  • Value = adjusted net profit × a multiple, plus stock at value.
  • Adjusted net profit is net profit before tax with one working owner’s wage, depreciation, interest, one-off costs and personal expenses added back. Brokers call this PEBITDA.
  • Most small and medium businesses sell for 1 to 5 times adjusted net profit. Small owner-operated businesses usually sit between 1 and 3 times.
  • Every add-back needs evidence. Buyers only pay for profit they can verify in the tax returns, BAS and bank statements.
  • Net profit suits profitable, owner-run businesses. Managed, fast-growing or asset-heavy businesses are better valued with other methods.

Net profit vs adjusted net profit

Net profit is what is left after every expense, including the owner’s wage (if one is paid), interest and depreciation. That is the right figure for your tax return, but it understates what the business would earn for a new owner. Brokers adjust it so buyers can compare businesses on the same basis. For the basic definition, see what is net profit.

Net profitAdjusted net profit (PEBITDA)
Where it comes fromYour profit and loss statement and tax return.Net profit before tax, with add-backs.
Owner’s wageDeducted, if paid.One working owner’s wage added back, because the buyer takes your place.
Interest and depreciationDeducted.Added back. The buyer will fund and depreciate the business their own way.
One-off and personal costsDeducted.Added back, with evidence.
Used forTax and reporting.Valuing the business for a sale.

Where the business is run by a manager, or the likely buyer is an investor, brokers use EBITDA instead and deduct a market salary for every role, including the owner’s. See business valuations based on EBITDA.

How to value a business on net profit

1. Work out adjusted net profit

  • Gather three years of profit and loss statements, tax returns and BAS.
  • Start from net profit before tax for each year.
  • Add back one working owner’s wage, depreciation, interest, genuine one-off costs and personal expenses run through the business.
  • Weight the result towards the most recent year. Buyers look at the trend, not a simple average, and rarely give credit for figures older than three years.

2. Choose the multiple

  • Start from the range for your industry. Our guide to valuing a business lists typical multiples by industry.
  • Move up the range for steady or growing profit, a long lease, contracts and a team that runs without you.
  • Move down for owner reliance, a short lease, a few large customers or ageing equipment.

3. Apply the multiple and add stock

  • Multiply adjusted net profit by the multiple. This is the price for the goodwill, plant and equipment.
  • Saleable stock is counted at settlement and added on top at cost. See selling a business that carries stock.
  • Check the result against the buyer’s return and the value of the assets.

Worked example

A landscaping business with $1.2 million turnover, trading for nine years. The owner works full time in the business. Figures are illustrative.

Illustrative only. Multiples vary by industry, size and risk.
Amount
Net profit before tax, per the accounts$110,000
+ Owner’s wage (one working owner)$85,000
+ Depreciation$28,000
+ Interest on equipment finance$9,000
+ One-off legal costs$6,000
+ Owner’s private vehicle costs$7,000
Adjusted net profit (PEBITDA)$245,000
Multiple2.0x to 2.6x
Indicative price range$490,000 to $637,000
Plus stock (plants and materials)At settlement

Why the add-backs matter: at 2.3x, the profit in the tax return ($110,000) points to a price of $253,000. Adjusted net profit ($245,000) points to $563,500.

Return check: at $563,500, a buyer who steps into the owner’s role keeps $160,000 a year before tax after paying themselves $85,000. That is about a 28% return on the price.

What you can and cannot add back

Add-backs turn the profit in your accounts into the profit a new owner would make. The buyer’s accountant will check each one, so keep the invoices and statements that support them.

Usually accepted

  • One working owner’s wage. The buyer takes your place.
  • Depreciation and amortisation. Non-cash costs that depend on how the accounts are kept.
  • Interest. The buyer will fund the business their own way.
  • Genuine one-off costs. A legal dispute, a rebrand or a relocation.
  • Personal expenses. Private car, phone or travel costs paid by the business.
  • Family wages above market. Only the amount paid above what the role is worth.

Usually rejected

  • Cash takings not in the accounts. Buyers and lenders will not pay for undeclared income.
  • Recurring “one-off” costs. Repairs or legal fees that come up most years.
  • A second owner’s wage. If the business needs two people, one of them is a cost.
  • Below-market rent or wages. If they will rise for the buyer, profit is adjusted down.
  • Future plans. Price rises or contracts that have not happened yet.

The business terms glossary explains PEBITDA, SAV and the other terms buyers use.

Typical net profit multiples

The multiple reflects how much risk the buyer takes on. A 2x multiple means the buyer expects to earn back the price in about two years of adjusted net profit.

Indicative multiples of adjusted net profit, plus stock at value.
Type of businessTypical multiple
Small owner-operated business1x to 3x
Larger business with a manager, contracts or recurring revenue3x to 5x

What pushes the multiple up

  • Profit that is steady or growing, and well documented
  • Recurring revenue, contracts or a wide spread of customers
  • A manager and team that run the business without you
  • A long lease, and equipment in good order

What pulls it down

  • Falling or uneven profit, or accounts that do not match the BAS
  • An owner who does most of the work or holds the key relationships
  • One or two customers making up most of the revenue
  • A short lease, high rent or major spending due on equipment

Ranges by industry: cafes, hospitality, beauty salons, franchises, consulting, construction, ecommerce, childcare and manufacturing.

When to use net profit

Net profit is the main method for most owner-run businesses selling for under about $5 million. Other methods suit different businesses, and a valuer will often use one as a cross-check.

MethodBest forRead more
Adjusted net profitProfitable, owner-run businesses.This guide
EBITDAManaged businesses and investor buyers.EBITDA valuations
Revenue multipleFast-growing businesses, or as a cross-check.Revenue multiple valuations
Discounted cash flowLarger businesses with long contracts, and formal valuations.Discounted cash flow valuations
Asset valueLow-profit or asset-heavy businesses. Sets the floor for any price.How to value a business

Limitations of a net profit valuation

  • The profit has to be provable. Add-backs without evidence, or income that was not declared, add nothing to the price.
  • Add-backs get challenged. A buyer’s accountant may reject some, which lowers the figure the multiple applies to.
  • It looks backwards. It values past profit, so it can undervalue a business that is growing quickly or has new contracts starting.
  • It ignores spending the business needs. Adding back depreciation does not remove the need to replace vehicles or equipment. Buyers allow for this in the multiple.
  • It does not suit every business. A business making little or no profit is usually valued on its assets instead.

For a sale, a broker’s appraisal of market value is usually enough. Tax, family law and disputes need a formal valuation. See the difference between a valuation and an appraisal.

FAQs

Start with net profit before tax from your accounts. Add back one working owner’s wage, depreciation, interest, genuine one-off costs and personal expenses to get adjusted net profit. Multiply that by a multiple for your industry and risk, then add saleable stock at cost.

Most small and medium businesses in Australia sell for 1 to 5 times adjusted net profit, plus stock. Small owner-operated businesses usually sit between 1 and 3 times. Larger businesses with a manager, contracts or recurring revenue reach the upper end.

Before tax. Brokers start from net profit before tax and add back interest, depreciation and one working owner’s wage. Tax depends on the buyer’s own structure, so it is left out.

Net profit is what is left after every expense. PEBITDA is profit before interest, tax, depreciation and amortisation, with one working owner’s wage added back. It shows what the business earns for an owner who works in it, which is what a buyer is paying for.

Use adjusted net profit (PEBITDA) if you work in the business and a buyer would take your place. Use EBITDA if a manager runs the business or the likely buyer is an investor, because every role then needs a market salary.

Usually not. The multiple values the goodwill, plant and equipment. Saleable stock is counted at settlement and paid for at cost on top of the price. Some smaller businesses sell walk-in walk-out (WIWO), with stock included.

On its assets. The value is based on what the equipment, fit-out and stock would sell for. A profitable business should always sell for more than its assets, which is why asset value is used as the floor for any price.

What is your business worth?

Our brokers value businesses against real sales data from 27+ years of business sales. 50+ specialist brokers in 8 offices across Australia. Confidential and no obligation.

This guide is general information, not financial, legal or tax advice. Every business is different, so speak to a broker, valuer or accountant before setting a price.

Sources: ATO, small business benchmarks and market valuation of assets; Business Queensland, valuing a business to buy or sell. Checked 13 October 2026.

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