More than an EBITDA multiple
A trade business is worth what its maintainable earnings support, adjusted for whether those earnings would continue under someone else. Getting there means normalising the accounts, understanding how the business really operates, choosing the right method for the business and the purpose, and testing the answer.
The method follows the business
The appropriate methodology depends on the characteristics of the business and the purpose of the valuation. No single method is always right. A profitable service business with recurring contracts, a plant-heavy earthmoving operation and a builder with a thin order book each call for a different primary approach.
The report states which methods were considered, which was used as the primary method and why, and how the result was cross-checked.
Methods we may apply
Usually one primary method and at least one cross-check. Where reliable evidence for a method does not exist, we say so rather than force it.
Capitalisation of maintainable earnings
The most common primary method for an established, profitable trade business. Normalised earnings that a new owner could reasonably expect to keep are multiplied by a capitalisation multiple that reflects risk and growth.
EBITDA-based approaches
Earnings before interest, tax, depreciation and amortisation. Useful for comparing businesses with different financing, but only sound if the cost of keeping the vehicles and plant current is dealt with separately.
EBIT-based approaches
Earnings after depreciation. Often the better base for plant-heavy businesses such as earthmoving, civil and concreting, because it charges the business for wearing out the assets it depends on.
Revenue cross-checks
An implied multiple of revenue, used where appropriate to test the conclusion, not to reach it. Revenue says little about value on its own when margins vary as widely as they do between trades.
Net tangible assets
The value of the assets less liabilities. It can set a floor under an earnings-based value and becomes the primary method where a business earns too little to support goodwill.
Asset-based methods
Market or orderly realisation values of plant, vehicles, stock and receivables. Used where the business is asset-rich relative to its earnings, or where a going concern is in doubt.
Comparable transactions
Prices paid for similar businesses, where sufficiently relevant and reliable data exists. Asking prices on sale listings are not transaction evidence, and we do not treat them as such.
Industry evidence
How businesses in the trade earn, the margins and labour models that are normal for it, and the factors buyers in that market pay for or discount.
Replacement-cost considerations
What it would cost to assemble the workforce, licences, fleet and customer base from scratch. Relevant when a buyer could build rather than buy.
Goodwill analysis
The value above net tangible assets, and how much of it belongs to the business rather than the owner personally. Personal goodwill does not transfer with a sale.
Before any method, the earnings are normalised
Reported profit reflects how the current owner runs the business and how the accounts are prepared for tax. A buyer will not inherit most of those choices. Normalisation restates earnings to what the business earns on a commercial footing.
- Owner wages
- Replaced with a market cost for the work the owner actually does: on the tools, quoting, supervising, managing.
- Related-party transactions
- Purchases from or sales to related entities at other than commercial terms.
- Discretionary expenditure
- Spending an owner chooses to make that a buyer would not need, such as sponsorships or above-market vehicles.
- Unusual legal expenses
- A one-off dispute or claim, separated from the normal cost of running the business.
- One-off costs
- Relocation, a system implementation, a recruitment drive, a rectification job.
- Abnormal revenue
- A single large project, an emergency event, or a contract that has ended.
- Non-commercial rent
- Premises owned by a related party and rented above or below market.
- Personal expenses
- Private vehicles, phones, travel and insurances run through the business.
- Non-recurring events
- Temporary subsidies, insurance recoveries, asset sale profits and similar items.
Normalising a trade business’s earnings
Illustrative- Reported net profit before tax
- $310,000
- Add: interest and depreciation
- $64,000
- Reported EBITDA
- $374,000
- Add: owner salary and super as paid
- $45,000
- Less: market cost of the owner’s role
- ($138,000)
- Add: private vehicle and phone costs
- $14,000
- Add: one-off legal costs
- $21,000
- Less: rent increased to market
- ($18,000)
- Normalised EBITDA
- $298,000
Figures are illustrative. In this example the business looks $76,000 less profitable to a buyer than its accounts suggest, mostly because the owner’s work was not being paid for at market rates.
How the pieces fit together
The sequence for a business valued on its earnings. Asset-based valuations follow a different path, set out in the report where used.
- ×Maintainable earningsNormalised earnings that a new owner could reasonably expect to sustain, on the earnings base that suits the business.
- ×Capitalisation multipleReflects the risk and growth of this business: its revenue quality, owner dependency, concentration, workforce and industry.
- =Enterprise valueThe value of the business operations, including the plant and working capital needed to run them.
- +Surplus assetsCash, property or equipment the business does not need to earn its profits.
- −Net debtBorrowings, equipment finance and similar obligations, and any shortfall in working capital against a normal level.
- =Equity valueThe value of the shares or units being valued, before any adjustment the purpose and the governing documents require for the particular interest.
Where the trade knowledge comes in
The multiple and the maintainable earnings both depend on judgements about the business: how much depends on the owner, whether the recurring work is contracted or habitual, how concentrated the customers are, whether the workforce is stable and licensed, and whether the fleet has been kept current.
Those judgements are where trade businesses differ most from each other, and where a generic multiple goes wrong. Our industry pages set out the questions we work through for each trade. Each risk is reflected once, either in the earnings or in the multiple, and the report says which.
The result is a valuation range and a concluded figure at the valuation date, with the assumptions and limitations stated. A valuation is an opinion of value at a date, for a purpose. It is not a prediction of the price a particular buyer will pay.
Guided by APES 225
APES 225 Valuation Services is the standard Australia’s accounting bodies set for valuation work. We are an independent valuation practice, not an accounting firm, and we hold every report we sign to it. The standard is theirs. The discipline is ours.
In practice that means the engagement is defined in writing before work starts, independence is stated and the fee is fixed, the reasoning is on the page, and the working papers are kept.
We do not provide legal, taxation or financial advice. Whether a valuation is needed for a tax or legal purpose, and at what date, is a matter for your adviser.
About our methodology
Do you just apply an industry multiple to EBITDA?
No. A multiple is the last step, not the first. We normalise the earnings, decide what is maintainable, assess the operating risks of this particular business and choose the earnings base and method that suit it. Any multiple used is explained and cross-checked. See EBITDA multiples for trade businesses.
Which valuation method will you use for my business?
The appropriate methodology depends on the characteristics of the business and the purpose of the valuation. Most profitable trade businesses are valued on capitalised maintainable earnings with a net assets cross-check; asset-heavy or marginal businesses may be valued on their assets. The report explains the choice.
Why does my accountant’s profit figure differ from the earnings you value?
Financial statements are prepared for tax and compliance, not to show what a new owner would earn. We adjust them for the owner’s market wage, related-party costs, personal expenses and one-off items. The report lists every adjustment so your accountant can check it.
How do you avoid counting the same risk twice?
Each risk is dealt with once. If the owner’s labour is replaced with a market wage in the earnings, the multiple does not also discount for that labour. If a customer loss is modelled in the earnings, it is not penalised again in the multiple. The report says where each risk has been reflected.
How are trade businesses valued
Start with a short intake. We confirm the fee and scope in writing.
An Independent Business Valuation is $1,995 + GST, with a draft before the report is finalised. Typical turnaround is 3 to 7 business days once all required information has been received.