--- title: "Business Valuation Methods Explained (Australia)" url: https://businessvaluationsmelbourne.com.au/guides/business-valuation-methods/ description: "Capitalisation of future maintainable earnings, discounted cash flow, net assets, market comparables and rules of thumb: when each fits and why." updated: 2026-11-11 --- # Business Valuation Methods Explained: Which One Fits Your Business Businesses are valued with three broad approaches: income, market and cost. The income approach includes capitalisation of future maintainable earnings, used for most established small and medium businesses, and discounted cash flow, used where earnings will change in a predictable way. The market approach compares sales of similar businesses. The cost or net assets approach suits asset-heavy or loss-making businesses. Industry rules of thumb are a sense check, not a method. A sound valuation explains why its method fits and uses a second as a cross-check. ## Key points - The ATO groups valuation methods into three approaches: market, income and cost. - Capitalisation of future maintainable earnings suits stable, profitable businesses and is the usual method for Melbourne SMEs. - Discounted cash flow suits businesses whose cash flows will change in a way that can be forecast with some confidence. - Net assets suits holding entities, asset-heavy businesses and those that do not earn enough to support goodwill. - The ATO asks valuers to explain why the chosen method is the most suitable and recommends a cross-check where possible. ## The three approaches behind every method The ATO's market valuation guide sets out three approaches. The market approach relies on market transactions for comparable assets, comparing the asset being valued with similar ones that have sold or are for sale. The income approach estimates value from the income or cash flows the asset is expected to generate, and the guide gives discounted cash flow and capitalisation of earnings as methods within it. The cost approach estimates what it would cost to replicate the asset in similar condition. The guide says the primary method should be the most suitable for the asset, given how reliable and relevant the available information is, and that the report should explain why. For tax purposes it highly recommends a secondary or cross-check method where possible. That is a sensible discipline for any valuation, tax or not. ## When each method fits | Method | Approach | Suits | Watch out for | | Capitalisation of future maintainable earnings | Income | Established, profitable businesses with a steady track record: most trades, professional practices, hospitality, retail and service businesses | Earnings must be properly normalised, including a market wage for the owner; the rate needs evidence | | Discounted cash flow | Income | Businesses with changing cash flows that can be forecast: a new site ramping up, a contract roll-off, a large capital program | Very sensitive to forecasts and the discount rate; weak where forecasts are optimistic or untested | | Net assets | Cost | Holding entities, property or investment companies, asset-heavy businesses, and businesses that earn too little to support goodwill | Book values are not market values; assets often need separate valuation | | Market comparables | Market | Industries with genuine, comparable sale evidence | Private sale data is thin and the facts behind each deal are usually unknown | | Industry rules of thumb | Market (informal) | A sense check alongside a primary method | Averages from unknown deals; ignore profit, lease and owner dependence | Our signed reports are a fixed fee of $1,495 + GST for a small business and $2,495 + GST for a medium business, and every one is independently reviewed by a suitably qualified business valuer. A small-business report is delivered in 2 business days and a medium-business report in 3 business days. Delivery time starts once payment and all required information have been received. Business Valuations Melbourne is not a registered tax agent. Get a fixed fee[Ask the valuer first](https://businessvaluationsmelbourne.com.au/contact/) ## Capitalisation of future maintainable earnings This is the method used for most Melbourne small and medium businesses, and for good reason. It values a business on the profit it can reasonably be expected to keep making, which is what a buyer is paying for, and it works with the information most private businesses actually have: a few years of accounts. The valuer first sets maintainable earnings. That means normalising the accounts by removing one-off items and personal expenses, resetting related-party rent and pay to market, deducting a market wage for each role the owner performs, and weighing several years rather than relying on one. The earnings measure is chosen to suit the business, commonly earnings before interest and tax, or before interest, tax, depreciation and amortisation where plant is treated separately. The valuer then applies a capitalisation rate, or its inverse, a multiple. The rate reflects risk: how dependent the business is on the owner, how concentrated its customers are, how secure its lease and contracts are, and how its industry is tracking. The report should explain each factor and the evidence behind the rate, then cross-check the result, often against net assets or market evidence. ## Discounted cash flow A discounted cash flow valuation forecasts the cash the business will generate over a period, usually several years, adds a terminal value for the years beyond, and discounts everything back to today at a rate that reflects risk. It is the right tool when the future will clearly look different from the past: a childcare centre in a growth area still filling its places, a manufacturer about to lose or gain a major contract, a business partway through a large investment. Its strength is also its weakness. Every input is an assumption, and small changes in the growth rate or discount rate move the answer a lot. For most established Melbourne SMEs, whose owners do not keep detailed multi-year forecasts, discounted cash flow adds precision on paper without adding reliability. Where it is used, the report should state the forecast assumptions and test them against the business's own history. ## Net assets The net assets method values a business at the market value of its assets less its liabilities. It suits entities whose value lies in what they own rather than what they earn: a company that holds property or investments, a business winding down, or a trading business whose profits are too low to justify paying anything for goodwill. In those cases a buyer would not pay more than the assets are worth, and a seller would not take less. The catch is that balance sheet values are rarely market values. The ATO's guide makes the point that market value is conceptually distinct from historical cost. Plant may be written down to almost nothing yet still be worth a good deal, and land is usually carried at cost. Where those assets are material, they are valued separately, plant by a plant and machinery valuer if needed and land by a property valuer in Victoria, and the business valuer brings the figures together. ## Market comparables and rules of thumb Comparing a business with similar businesses that have sold is a natural idea, and for listed companies there is plenty of data. For private Melbourne businesses there usually is not. Sale prices are often confidential, and where a price is known, the facts behind it are not: what the earnings really were, what the lease looked like, whether the vendor stayed on, whether stock and equipment were included. That makes direct comparison hard to rely on as a primary method, though market evidence remains valuable for testing the rate or multiple. Industry rules of thumb, such as a multiple of weekly takings or a percentage of fees, are the informal end of the market approach. They are quick and widely quoted, and they have no way to capture the facts that move value most. A valuer may report one as a sense check where an industry uses it. A report that rests on a rule of thumb alone is not a valuation. ## Why most Melbourne SMEs are valued on earnings - Buyers of small and medium businesses are buying an income stream, so value follows maintainable earnings. - Most private businesses have reliable historical accounts but not reliable long-range forecasts, which favours capitalisation of earnings over discounted cash flow. - Goodwill, the part of value above net assets, only exists where earnings support it, and the earnings method measures it directly. - Private sale evidence is too thin and opaque to carry a valuation on its own, though it helps test the multiple. - Earnings-based valuations are easy for a buyer's accountant, the ATO or a court to follow and test, step by step. ## Common questions. What is the most common method for valuing a small business in Australia? + For established, profitable small businesses, capitalisation of future maintainable earnings is the usual method. The valuer normalises the accounts, deducts a market wage for the owner, settles on maintainable earnings and applies a capitalisation rate that reflects risk, then cross-checks the result with a second method. What is the difference between EBIT and EBITDA in a valuation? + EBIT is earnings before interest and tax; EBITDA also adds back depreciation and amortisation. Valuers choose the measure that suits the business. Where plant must be replaced regularly, EBIT often reflects the real cost of staying in business better. The rate or multiple must be applied to the same measure it was derived for. When is a business valued on net assets? + When its value lies in what it owns rather than what it earns: holding companies, property or investment entities, businesses winding down, and businesses whose profits are too low to support goodwill. Assets are restated to market value, often with separate plant or property valuations, and liabilities are deducted. Is discounted cash flow better than an earnings multiple? + Not as a rule. Discounted cash flow suits businesses whose cash flows will change in a way that can be forecast, but it is very sensitive to its assumptions. For a stable business with a solid history, capitalised earnings are usually more reliable. A good report explains why the chosen method fits. Does the ATO require a particular valuation method? + Its market valuation guide does not prescribe one method. It describes the market, income and cost approaches, asks that the method chosen be the most suitable for the asset with reasons given, and recommends a secondary or cross-check method where possible. Your accountant applies the value to your tax position. How much does a business valuation cost? + The fee is fixed before work starts and set by annual turnover: $1,495 + GST under $2 million, $2,495 + GST for $2 million to $3 million, $3,495 + GST for $3 million to $10 million, and a written quote above $10 million. Small reports take 2 business days and medium and large reports 3 business days, counted from when payment and all the information we need are in. Related valuations - [CGT Valuation Melbourne](https://businessvaluationsmelbourne.com.au/services/cgt-valuation/) - [Share and Unit Valuation Melbourne](https://businessvaluationsmelbourne.com.au/services/share-unit-valuation/) - [Business Restructure Valuation Melbourne](https://businessvaluationsmelbourne.com.au/services/restructure-valuation/) Industries - [Manufacturing Business Valuations in Melbourne](https://businessvaluationsmelbourne.com.au/industries/manufacturing/) - [Childcare Centre Valuations in Melbourne](https://businessvaluationsmelbourne.com.au/industries/childcare-centres/) - [Wholesale and Distribution Business Valuations in Melbourne](https://businessvaluationsmelbourne.com.au/industries/wholesale-and-distribution/) More guides - [How Much Is My Business Worth? How Melbourne Businesses Are Actually Valued](https://businessvaluationsmelbourne.com.au/guides/how-much-is-my-business-worth-melbourne/) - [How to Choose a Business Valuer in Melbourne: What to Check Before You Engage](https://businessvaluationsmelbourne.com.au/guides/how-to-choose-a-business-valuer-melbourne/) - [Business Valuation vs Broker Appraisal: What Each Is For and When You Need Which](https://businessvaluationsmelbourne.com.au/guides/business-valuation-vs-broker-appraisal/) - [Landholder Duty and Business Sales in Victoria: Why the Business and the Land Are Valued Separately](https://businessvaluationsmelbourne.com.au/guides/landholder-duty-business-sales-victoria/) - [Shareholder Disputes in the Supreme Court of Victoria: Oppression, Buyouts and the Valuation](https://businessvaluationsmelbourne.com.au/guides/shareholder-disputes-supreme-court-victoria/) - [Selling a Business in Victoria: A Step-by-Step Checklist for Owners](https://businessvaluationsmelbourne.com.au/guides/selling-a-business-in-victoria/) - [Documents Needed for a Business Valuation: The Practical Checklist](https://businessvaluationsmelbourne.com.au/guides/documents-needed-for-a-business-valuation/) Sources - [Market valuation for tax purposes (guide)](https://www.ato.gov.au/law/view/document?docid=SGM/market_val), Australian Taxation Office - [Market valuation of assets](https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/market-valuation-of-assets), Australian Taxation Office This guide explains how valuations work. It is not tax, duty or legal advice: those positions are for your accountant, lawyer or the relevant regulator. Talk to a valuer ## Tell us what you need valued. A fifteen-minute call confirms the package, the fixed fee and the delivery date, before you commit to anything. 03 8375 4177 Mon to Fri, 9am to 5:30pm Melbourne time Send the form and we reply within one business day. No documents needed to start. Small Business Valuation $1,495 + GST For a business with annual turnover under $2 million. Signed report in 2 business days. Delivery time starts once payment and all required information have been received. The fee is fixed in writing before we start and never tied to the outcome. Larger business? Tell us in the form and we recommend the right package. [All fees](https://businessvaluationsmelbourne.com.au/fees/) Last reviewed 11 November 2026 by Business Valuations Melbourne, Level 7, 55 Collins Street, Melbourne. --- Business Valuations Melbourne · Level 7, 55 Collins Street, Melbourne VIC 3000 · 03 8375 4177 · https://businessvaluationsmelbourne.com.au/start/