"What's my business worth?" It's the question every founder asks, and the answer is often frustratingly vague. You've poured years of your life into building your company, but its final value isn't based on your past effort. It's based on a buyer's perception of its future profitability and risk. The key to unlocking that value lies in understanding one core concept: business valuation multiples.

Too many Australian owners focus solely on revenue or profit. While these are vital, the multiple applied to that profit is what separates a good exit from a life-changing one. In this article, we'll demystify the valuation process, break down the simple formula buyers use, and reveal the seven critical levers you can pull to increase your multiple and, ultimately, your final sale price.

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How are Business Valuations Calculated?

At its core, the valuation for most private businesses comes down to a straightforward formula based on two factors: the return an asset generates and the risk associated with that return.

Business Valuation=Normalised NOPAT×Multiple

Let's quickly break that down:

• Normalised NOPAT (Return): This stands for Net Operating Profit After Tax. "Normalised" means you adjust the figure to reflect the true, ongoing profitability of the business. This involves adding back one-off or non-commercial expenses (like a large, non-recurring legal fee) and removing personal owner expenses (like a family car run through the company) that a new owner wouldn't incur. This figure represents the true "return" the business generates.
• Multiple (Risk): This is the magic number. It's a multiplier that reflects the quality and risk of your earnings. A business with reliable, growing, and low-risk earnings will command a high multiple. A business with volatile, unpredictable, or high-risk earnings will receive a low one.

Your profit might be what it is today, but the multiple is where you have the most influence. Improving your business isn't just about increasing NOPAT; it's about increasing the quality of that NOPAT to command a higher multiple.

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Why NOPAT? A Note on "EBITDA"

You've likely heard the term EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) used in valuations. While common, it's a flawed metric because it excludes too many real costs of doing business. As the name suggests, it's a measure of profit before key items are paid.

NOPAT, in contrast, is the profit after everything is included. To calculate the true underlying value, you must factor in all real costs. As legendary investor Warren Buffett, an ardent critic of EBITDA, states, costs like depreciation aren't "non-cash" expenses—they are a delayed recording of a cash expense for capital expenditures that are absolutely essential for a business to operate.

His partner, Charlie Munger, is even more direct: "I think that every time you saw the word EBITDA, you should substitute the word 'bullshit' earnings."

For this reason, our methodology is built on NOPAT, which is a more realistic measure of a business's true value.

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The 7 Levers That Drive Higher Valuation Multiples for Australian SMEs

A buyer is assessing the risk and future potential of your business. Your job is to de-risk their investment and paint a compelling picture of future growth. Focusing on the following seven levers will reduce your business's risk profile and justify a higher NOPAT multiple.

1. Financial Performance & Predictability 

Buyers pay a premium for certainty. A history of consistent, predictable revenue and profit is far more valuable than a "hockey stick" projection with no track record. Businesses with a high percentage of recurring revenue (e.g., SaaS subscriptions, service contracts) are prime examples and often command the highest multiples.

2. Scalability & Growth Potential 

Is your business positioned for growth, or has it hit a ceiling? A buyer wants to see a clear, believable plan for how they can grow the business after you're gone. This could be through market expansion, new product lines, or improved operational efficiency. High growth potential directly increases value.

3. Customer Diversification & Concentration Risk 

If your top customer accounts for 40% of your revenue, a buyer sees a massive risk. What happens if that customer leaves? A diverse customer base, with no single client making up more than 10% of revenue, significantly de-risks the business and boosts the multiple.

4. Owner Dependence (The "Bus Test") 

If you were hit by a bus tomorrow, would the business survive? If the answer is no, you have a major valuation problem. This is a significant risk factor known as key-man dependence. A business that relies heavily on the owner's personal relationships, skills, or operational involvement is not a transferable asset; it's a job. Reducing owner dependence is a core goal of exit planning in Australia.

5. Documented Systems & Processes 

Do you have an operations manual? Are your sales processes documented? Can a new team member get up to speed quickly? Documented systems turn your business from a collection of people into a well-oiled machine that a new owner can confidently take over. This helps it "look and feel" more like a larger, less risky corporate entity.

6. Strength of the Management Team 

A strong, capable management team that can run the day-to-day operations without you is one of the most powerful value drivers. It gives a buyer confidence that the business's performance will continue seamlessly after the transition.

7. Competitive Moat & Industry Position 

What makes your business defensible? This could be protected intellectual property, a strong brand reputation, exclusive supplier agreements, or a unique market position. A strong competitive "moat" protects future cash flows from competitors, making them more valuable.

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What Multiples Are Common for Australian SMEs?

This is highly industry-dependent and reflects the perceived risk of the business. Rather than fixed ranges, it's more helpful to think of multiples on a sliding scale.

Large, publicly listed companies often trade at high multiples (e.g., a Price/Earnings ratio of 9x or 10x), but it's a mistake to apply these directly to a small private business. An M&A advisor will take the multiple for a similar listed company and then apply a significant discount to account for the increased risks inherent in a smaller business.

These discounting factors include:

• Key-Man Dependence: Reliance on the owner.
• Geographic Risk: Being based in a single location.
• Financial Risk: Limited ability to raise capital for growth.

Therefore, a small private company may trade on a NOPAT multiple of 2x to 4x, even if its listed counterpart trades at 10x.

The key takeaway is this: the multiple is not fixed. It's a reflection of the quality and risk of your business. By focusing on the seven levers above, you can directly influence your valuation multiple and close the gap between your business and a large corporation. This is the entire purpose of a strategic exit readiness plan.

Your business's final worth is something you build over time, not something you discover at the end. By understanding and actively improving the factors that drive your valuation multiple, you can take control of the number and ensure your exit is as rewarding as it deserves to be.

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Key Takeaways

• Valuation = Normalised NOPAT × Multiple;
• EBITDA excludes real business costs. NOPAT reflects true profitability;
• 7 levers influence multiples: Recurring revenue, Scalability, Customer diversification, Owner dependence, Documented systems, Management strength, and Competitive moat;
• Australian SME multiples typically range 2x–4x NOPAT;
• Strategic preparation can significantly increase your final sale price.

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Want to maximise your business’s valuation multiple? Book a confidential strategy session with Wombat Wealth to assess your exit readiness and unlock your company’s true potential.