What's Your Business Worth?
When you are planning to buy or sell a business how can you work out how much it is worth?
Business Valuation Methods
There are many different ways of valuing a business for sale in New Zealand. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, - and 96% of all New Zealand businesses are in that size range) need a different approach. Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
When valuing a business for sale the value of the business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations. Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables. Find out more on how to increase the multiple of your business.
Business Valuation Method: The Earnings Multiplier
One method used to value a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Seeing it in practice
| Business | Annual EBPIDT | Earnings multiple | Indicative value |
|---|---|---|---|
| Small retail store | $60,000 | 1.5 | $90,000 |
| Established trades business | $120,000 | 2.0 | $240,000 |
| Cafe with strong repeat trade | $85,000 | 1.8 | $153,000 |
The multiple applied depends entirely on the business - its stability, growth trend, and how much of the profit relies on the current owner. That's exactly why it pays to check recent, comparable sales rather than guess.
Finding the Right Earnings Multiple
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
- Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
- Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
- Your business broker can share his/her experience.
- Use a commercial data base which lists sales by business brokers throughout NZ "BizStats". This will tell you what earnings multiples have been used in recent sales and help you value a business. It will cost you $180 + GST (for 3 reports) and may provide a useful guidelines in doing business valuations.
Buying or selling a business is a major investment decision. Careful research and professional advice can help you to get the right value when valuing a business.
This article has been provided by Guy Crozier - (BizStats Limited) bizstats.co.nz
Last updated: August 2026
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Common Questions About Valuing a Business
What is EBPIDT?
EBPIDT stands for Earnings Before Proprietor's Income, Interest and Depreciation - sometimes called Seller's Discretionary Cashflow. It strips out the owner's wages or drawings so you can see the real earning capability of the business itself, separate from how the current owner happens to be paid.
What earnings multiple should I use?
There's no single correct multiple - it depends on the business, its industry, and recent comparable sales. Avoid generic "rules of thumb," which are often outdated. Ask your accountant, a business broker, or check a database of actual recent sales like BizStats.
How much does a BizStats report cost?
A BizStats report costs $180 + GST (for 3 reports) and shows the earnings multiples actually used in recent, comparable business sales across New Zealand.
Are debtors and creditors included in a small business sale price?
No. For most small NZ business sales, the value is based on inventory, plant and fittings, plus goodwill - debtors and creditors are normally excluded from the sale contract.
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