Business Sales Multiples Used in Business Valuation and Appraisal
When you're looking to buy a business or sell your business in New Zealand, one of the key tools used in business valuation and appraisal is the multiple. Multiples are commonly used to estimate the market value of a business based on its profit. This method is used by business brokers, accountants, and buyers to determine whether the price of a business is reasonable, and whether it stacks up in the current business sales environment.
What Is a Business Sales Multiple?
A multiple is a number applied to a business’s profit to estimate its market value. It is found by analysing recent business sales and comparing the sale price to the profit. For example, if a business sells for $1,000,000 and has a profit of $250,000, then the multiple is 4.
This approach is widely used by both buyers and sellers. If you’re asking how do you sell your business effectively, understanding multiples is essential.
Which Types of Profit Are Used in Multiples?
Not all profits are calculated the same way. In the world of business brokers Auckland and valuation professionals, you’ll hear about:
SDE (Seller’s Discretionary Earnings) – often used in owner-operator businesses. It reflects what a full-time working owner could earn.
EBIPTDA – Earnings Before Interest, Taxes, Proprietor’s salary, Depreciation and Amortisation. Common in small business sales.
EBIT – Earnings Before Interest and Taxes, including all salaries. Often used for larger, more structured companies.
Each of these can be multiplied by a different factor, depending on the business type and buyer expectations.
What Affects the Size of the Multiple?
The multiple applied to a business isn’t random. Key value drivers can push it higher or lower. These include:
Industry norms – Some sectors (like tech or healthcare) command higher multiples.
Business size – Larger businesses with more stable cash flows typically have higher multiples.
Growth potential – Buyers pay more for businesses with strong future prospects.
Risk profile – Low-risk, well-established companies fetch stronger multiples.
Market comparables – What similar companies sold for recently.
A knowledgeable business sale broker will consider all of these factors to advise on the right pricing.
Buyers use multiples to:
Compare profitability between different businesses.
Assess return on investment.
Benchmark opportunities.
If you're planning to buy a business, understanding which type of profit is being used, and whether the multiple is in line with market expectations, is vital to avoid overpaying.
Why Sellers Should Understand Multiples
If you're looking to sell my business or sell a company, knowing what influences the multiple can help you:
Set a realistic asking price.
Justify your valuation to buyers.
Understand how to increase your business’s value before sale.
Multiples are a powerful tool in business valuation, but they’re not a one-size-fits-all formula. If you want to sell your business or buy a business with confidence, work with a qualified business broker (Me) who understands local market conditions and industry benchmarks.
