Buying a Business: How to Value It Before You Borrow

In short: When buying a business, value it the way a lender will: on the earnings it can reliably produce after paying someone to run it, not on the asking price. Most small and medium businesses are priced as a multiple of adjusted earnings - EBITDA, or seller's discretionary earnings for owner-run businesses - with stock and equipment on top or included. The lender then asks a narrower question: how much of that price can the cash flow repay? The gap is usually your equity.

Key takeaways

A price is only meaningful against adjusted earnings: add back genuine one-offs and owner perks, then deduct a market wage for whoever will run the business.
An earnings multiple and a return on investment are the same idea upside down - a 4x multiple is a 25% return.
Most of the price of a profitable small business is usually goodwill, which a lender treats as having little recovery value.
The lender sizes the loan from debt service cover, not from the price, so expect to fund the difference with equity, vendor finance or extra security.
Check three to five years of records before agreeing a price, and question every add-back you cannot evidence.

What methods are used to value a business?

There is no single set method. The government's guide to valuing a business lists market and industry value, return on investment, the value of the assets, the cost of starting from scratch and future profit, and notes that for a buyer the biggest value is usually future profit. It also makes the point every buyer should remember: the value is what the market or a buyer is willing to pay.

Method	How it works	When it fits	How a lender reads it
Earnings multiple	Adjusted EBITDA or SDE times a multiple	Profitable, established businesses	The main test, cross-checked against debt service cover
Return on investment	Net profit divided by price, as a percentage	Small owner-run businesses	Same idea as a multiple, inverted
Asset value	Tangible assets plus intangibles, less depreciation	Asset-heavy or marginally profitable businesses	The floor: what might be recovered
Cost to start from scratch	What it would cost to build the same business today	A cross-check on the goodwill premium	Rarely relied on
Industry rules of thumb	For example, a multiple of recurring fees	Sectors with active buyer markets	Useful context, never the whole answer

The return on investment formula on that page - net annual profit divided by selling price, times 100 - is the inverse of a multiple. A business earning $160,000 priced at $640,000 returns 25%, which is the same as a 4x multiple.

How do EBITDA and SDE multiples work?

EBITDA is earnings before interest, tax, depreciation and amortisation. It strips out how the vendor financed the business and how the accountant depreciated its assets, so different businesses can be compared. It assumes the business already pays someone a market wage to run it.

SDE, seller's discretionary earnings, starts from EBITDA and also adds back the owner's own wage and personal benefits run through the business. It suits owner-operated businesses, where the buyer will step into the owner's job, but it overstates what the business earns for an investor who will hire a manager.

Multiples vary widely by industry, size and risk. As an indicative guide only, small owner-run businesses often trade at lower multiples of SDE, while larger businesses with management in place, recurring revenue and diverse customers command higher multiples of EBITDA. What moves a multiple up or down:

Up: contracted or recurring revenue, a long lease, a team that runs without the owner, growing earnings, many small customers.
Down: one or two large customers, a short or uncertain lease, earnings that depend on the vendor's relationships, a declining trend, deferred maintenance on equipment.

Worked example: adjusting earnings for the owner's wage

For illustration, a business is listed at $650,000 including equipment, plus stock at valuation (about $50,000). The vendor works full-time and takes no wage, only drawings.

Line	Amount
Reported net profit	$210,000
Add back interest on the vendor's loans	$15,000
Add back depreciation	$25,000
Add back the vendor's personal car and phone	$12,000
Add back a one-off legal cost (with invoices)	$8,000
Seller's discretionary earnings	$270,000
Less a market wage for a manager, including super (assumed)	-$110,000
Normalised EBITDA	$160,000

On these numbers the $650,000 price is 2.41 times SDE and 4.06 times normalised EBITDA, or a 24.6% return on the normalised figure. Whether that is fair depends on the industry and the risks above. What matters for borrowing is that the buyer who steps into the manager's role still needs to be paid: the lender will assess the loan on something close to the $160,000, not the $270,000.

How much of the price is goodwill?

Split the price into what you can touch and what you cannot. In the example, the equipment is worth about $120,000 at market value after depreciation, stock is charged separately, and the remaining $530,000 of the $650,000 price is goodwill.

business.gov.au's key financial terms describe goodwill as an intangible asset that represents the value of a business's reputation - the customers, brand, systems and staff that make the earnings repeat. It is real value to a buyer while the business keeps trading. To a lender it is the part of the price that disappears if the business fails, because it cannot be sold separately from the earnings it produces.

That is why the asset value matters even when you price on earnings. It is the floor under the deal: $120,000 of equipment that might fetch less at auction, plus any stock and debtors. A deal where goodwill is more than 80% of the price, as here, will need the loan to be supported by cash flow, by other security or by the vendor. Our guide to secured vs unsecured business loans explains how that choice changes the rate.

Why does the lender's view of value differ from the asking price?

The asking price is a marketing number set by the vendor and their business broker. A lender is not trying to decide whether the price is fair; it is deciding how much debt the business can repay and what it could recover if it could not. Those questions usually produce a smaller number.

Continuing the example (illustrative rate and terms, not an offer): suppose the lender wants debt service cover of 1.5 times on normalised EBITDA of $160,000. Annual repayments can be at most $160,000 / 1.5 = $106,667. At 9.0% over five years, principal and interest, a loan of about $425,000 costs $8,822 a month, or $105,868 a year - debt service cover of 1.51 times.

Funding the purchase	Amount
Price including stock	$700,000
Loan supported by cash flow	$425,000
Buyer's contribution before costs	$275,000 (39% of the price)

Legal, accounting and due diligence costs come on top. Lenders differ on whether they deduct tax and maintenance capital spending before testing cover, so treat this as an upper bound. Run your own numbers in the ICR and DSCR calculator, then compare the result with the price. If the gap is larger than your equity, the answer is a lower price, vendor finance, or property as extra security - not a stretched forecast.

Which earnings adjustments will a lender accept?

Add-back	Usually accepted?	Evidence needed
Depreciation and the vendor's interest	Yes	Financial statements
Owner's personal expenses through the business	Yes, if clearly personal	Ledger detail and invoices
Genuine one-off costs	Yes, if they really do not recur	Invoices; the same item absent in other years
"Cash sales not in the books"	No	Lenders lend only on declared income
Family members working unpaid	No - a market wage must be deducted	Rosters and roles
Below-market rent paid to the vendor	No - restate at the new lease rent	The new lease or a market rent opinion
Cost savings the buyer plans to make	Rarely	A credible, specific plan

A one-off that appears every year is a cost. Ask the vendor's accountant to reconcile each add-back to the ledger, and expect your lender to do the same.

What should you check before you agree a price?

The government's guide to buying an existing business recommends examining the past three to five years of financials - tax returns, BAS, balance sheets, profit and loss, cash flow and sales records - and considering a professional valuation of assets and liabilities. Before you agree a number, test it against:

Trend. Three years of rising earnings deserve a different multiple from three years of decline.
Concentration. If one customer is more than a fifth of sales, ask what happens to the price if they leave.
The lease. Years remaining, options, and whether the landlord will transfer it.
Vendor dependence. Whose relationships hold the customers and suppliers, and how long the vendor will stay to hand over.
Working capital. Whether debtors, creditors and stock come with the business, and how much cash you need on day one.
The entity. Search the company and its officers on ASIC's registers, including the banned and disqualified lists.

Our guide to business acquisition finance covers the loan structures that follow from the answers.

How do different lenders treat the same valuation?

Lender type	What drives the loan amount	Typical security	Trade-off
Banks	Debt service cover on normalised earnings, plus a cap relative to price	Business assets plus, commonly, property	Sharper pricing, more documentation, property often expected for goodwill-heavy deals
Non-bank cash flow lenders	Earnings quality and history	Business assets and a director's guarantee	Less property needed, higher rate, shorter term
Private lenders	Equity in the property offered	Registered security over real property	Earnings matter less, cost is higher, term is short with an exit needed

Whichever route fits, the valuation work above is the core of the loan request: normalised earnings, the split between goodwill and assets, and how the gap will be funded. When you have it, post one business acquisition finance request on ADS and 200+ verified lenders and brokers can ask about it.

Frequently asked questions

How many times profit is a small business worth?

There is no standard figure. Multiples vary widely with industry, size, earnings trend, customer concentration and how dependent the business is on its owner. Smaller owner-run businesses generally trade at lower multiples than larger ones with management in place and recurring revenue. Always check which earnings figure a multiple is quoted on.

What is the difference between EBITDA and SDE?

EBITDA is earnings before interest, tax, depreciation and amortisation, assuming the business pays a market wage to whoever runs it. SDE, seller's discretionary earnings, also adds back the owner's wage and personal benefits. SDE suits owner-operators; EBITDA is closer to what a lender will assess.

Do I need a professional valuation to borrow for a business purchase?

Not always, but it helps and larger deals may require one. business.gov.au suggests considering a professional valuation of assets and liabilities. A lender will at least want the financials behind the price and an explanation of every adjustment to earnings, and may order its own equipment or property valuation.

Will a lender lend against goodwill?

Some lenders will, partly, when earnings are strong and well documented, usually at higher rates and with a director's guarantee. Many expect property or other tangible security when goodwill is most of the price, because goodwill has little value if the business stops trading.

Is stock included in the purchase price of a business?

It depends on the contract. Stock is commonly added at valuation on the settlement date, after a stocktake, so the final price differs from the listed price. Agree the method in writing, and include the stock amount when you work out how much you need to borrow.

Sources

Value your business: valuation methods and goodwill — business.gov.au
Key financial terms: goodwill, net profit, equity — business.gov.au
Buy an existing business: due diligence and three to five years of records — business.gov.au
Search ASIC registers — Australian Securities and Investments Commission

Information current as at 24 October 2026.

General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.

Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.