Business valuation methods explained.
A plain-English explanation of the accepted methodologies used in Australian business valuations and when each applies.
The main business valuation methodologies used in Australia are: Capitalisation of Maintainable Earnings (CME), EBITDA and revenue multiples, Net Asset Value (adjusted), Discounted Cash Flow (DCF), and Comparable Transactions. Each methodology applies in different circumstances, and most engagements test multiple methodologies before concluding at the most supportable position.
Capitalisation of Maintainable Earnings (CME)
The dominant methodology for profitable Australian SMEs. CME takes a normalised earnings figure (typically EBITDA or NPAT) and capitalises it by an appropriate market multiple to derive an enterprise value. The "maintainable earnings" reflects the sustainable, repeatable earnings of the business — adjusted for one-off items, owner-operator remuneration variance, and related-party transactions. The multiple is selected from market evidence and adjusted for entity-specific risk.
EBITDA and revenue multiples
A market-based methodology that benchmarks the entity against comparable private and public transactions. Useful as a primary method where comparable evidence is strong, and as a cross-check for CME conclusions. Revenue multiples are more common for higher-growth businesses where current earnings do not reflect mature potential; EBITDA multiples are more common for established trading businesses.
Net Asset Value (adjusted)
Used for asset-heavy entities, holding companies, or businesses where earnings do not reasonably support a higher value. The methodology values each asset at market and deducts liabilities at face. Adjusted NAV often acts as a floor — where the trading-based valuation is below adjusted NAV, the NAV is typically the more supportable conclusion.
Discounted Cash Flow (DCF)
Income-based methodology that forecasts future cash flows and discounts them to present value at an appropriate discount rate. Most useful where reliable forecasts exist and projected cash flows differ materially from historical performance (e.g., emerging high-growth, capital-intensive, contract-pipeline businesses). Less useful where forecasts are speculative or where the discount rate is highly judgmental.
Comparable Transactions
Market-based methodology drawing on transaction evidence from comparable businesses. Useful as a cross-check across other methodologies. Limited by the availability and comparability of transaction data in the Australian SME market, where many transactions are not publicly disclosed.
Why methodology selection matters
Different methodologies applied to the same business can produce different supportable conclusions. The role of the valuation specialist is to select the methodology or methodologies appropriate for the entity, evidence and purpose — and to document the reasoning for selection and for rejection of other methods. The most supportable valuation position is identified within the range produced by the tested methodologies.
Common questions.
Which methodology produces the highest value?+
There is no general answer — it depends on the entity. For a profitable trading business, CME and EBITDA multiples typically produce similar conclusions. For a high-growth business, DCF may produce a higher value than CME based on historical earnings. For an asset-heavy entity, NAV may produce a higher floor than earnings-based methodologies. The correct answer is the methodology that best fits the entity and purpose — not the one that produces the highest number.
Can a single methodology be enough?+
For very simple engagements (Essential tier), a single methodology may be appropriate. For most matters (Comprehensive and above), multiple methodologies are tested to identify the supportable range and to provide cross-check on the primary conclusion.