You ask the question every owner eventually asks: “What’s my business worth?” And the answer comes back wrapped in language designed to make you feel slightly behind. EBITDA. Maintainable earnings. Multiples. Earn-outs. Holdbacks. Deferred consideration. There’s a number in there somewhere, but it arrives surrounded by qualifications, and the people delivering it have all done this before, and you haven’t.
Most owners come away with a figure they can’t quite explain to their spouse. Some take it at face value. Others reject it as too low and assume the buyer doesn’t understand the business. Both reactions are common, and both can be expensive.
What the maths actually is, underneath the vocabulary, is not complicated. The formula that sits behind almost every Australian SME valuation conversation can be written on the back of a napkin. The levers that move the answer are well understood. And the gap that turns up most often in failed deals, research from one of the leading exit-planning bodies suggests sellers typically overvalue their businesses by 40 to 60 percent, is mostly a gap of explanation, not a gap of judgment. So here’s the explanation, in plain language, of what’s inside the number.
What “Maintainable Earnings” Actually Means
The formula at the centre of an SME valuation conversation looks like this: maintainable earnings, multiplied by a multiple, equals a price. Two variables. That’s it.
“Maintainable earnings” is usually expressed as EBITDA (earnings before interest, tax, depreciation, and amortisation) and what makes it “maintainable” is the work of stripping out anything a new owner couldn’t expect to see continue. That includes the one-off costs (the legal bill from a dispute that’s now resolved, the redundancy payment to the long-tenured employee you replaced last year, the consulting fee for the rebrand). It also includes adjustments for the owner’s own remuneration: if you’ve been paying yourself below market because the business is yours and you live off the dividends, the buyer will normalise that to a fair-market salary for someone running the business. If you’ve been paying yourself well above market for the same reason in reverse, the adjustment runs the other way.
This process is called normalisation. In plain terms, normalisation is the work of stripping out anything a new owner couldn’t expect to inherit, so the EBITDA being multiplied represents a profit base the buyer can reasonably price off. It is not designed to short-change anyone. Australian advisers running these calculations describe it the same way: the buyer is pricing the profit a new owner could realistically expect to inherit, not the profit tied to the current owner’s specific circumstances. That’s a different question from “what does this business currently produce” and the difference is often where the first round of disagreement happens.
What Moves the Multiple
The multiple is the second variable. For established Australian service businesses, current market reporting puts the typical range somewhere between three and six times normalised EBITDA, depending on the quality of the business. Manufacturing, software, and other categories sit in their own ranges, but the principle is the same: the multiple reflects the buyer’s judgment about how reliably the earnings will continue.
Three things, more than anything else, push a business toward the top of its range. The first is the quality of the revenue itself. Recurring or highly repeatable revenue: subscriptions, maintenance contracts, customers who buy the same thing year after year, is worth more than project-based work that has to be re-won every cycle. The second is the dependence of the business on the owner. A company that runs without you is worth significantly more than one that runs through you, because what the buyer is pricing is what the business does after you stop. The third is the defensibility of the market position. Businesses with real moats: proprietary IP, a niche position competitors find hard to replicate, switching costs that keep customers in place, are pricing in protection that less-defended competitors don’t have.
Recent Australian valuation work suggests these factors can shift the multiple by half a turn to one and a half turns in either direction. On a business doing two million dollars of normalised EBITDA, that’s the difference between a six-million-dollar valuation and a thirteen-million-dollar one. Same earnings. Different business, in the eyes of the buyer.
Why Earn-Outs Exist
Almost no SME deal completes on a single number paid on a single day. The structure of the deal: earn-outs, deferred consideration, holdbacks, transition arrangements, is where the second half of the negotiation lives, and it’s the part most sellers walk into least prepared for.
The reason these structures exist is straightforward: they are how buyers and sellers bridge a gap when they are looking at the same business and seeing different futures. The seller knows what the business has produced; the buyer is taking a view on what it will produce once they’re the ones running it. An earn-out is a way of saying: if the next twelve, twenty-four, or thirty-six months look like the seller says they will, additional consideration is paid. If they don’t, it isn’t. Recent Australian M&A reporting from major legal and corporate finance firms has noted a material increase in earn-out and deferred-payment structures in 2024, and the trend is expected to continue.
Two things are worth knowing if you encounter one. First, earn-outs are not, as some owners assume, a way for buyers to avoid paying the headline price. They’re a risk-sharing tool, and a well-structured earn-out can deliver more total value to a seller whose business performs as advertised, not less. Second, they carry meaningful tax complexity in Australia. Sellers can be liable for tax on the market value of the earn-out at the point of sale, regardless of whether the additional payments are eventually received. That isn’t a reason to refuse them; it is a reason to engage tax advice early, before the structure is locked in.
The most useful thing about understanding this maths is that it tells you exactly what to work on, regardless of when you sell. Owners who go to market having quietly increased the share of recurring revenue, reduced the business’s dependence on them personally, and sharpened the position that makes them hard to replace are not trying to win the valuation conversation. They’ve simply done the work that the valuation is, ultimately, measuring. The multiple isn’t moved by negotiation skill in the deal room. It’s moved by the shape of the business that walks in.
If a buyer ran the formula on your business tomorrow: normalised EBITDA, applied multiple, what would the answer be? More importantly, where on the range would you sit, and what would move you to the next half-turn? That’s not a sales question. It’s a planning question, and it’s worth a quiet hour with someone who can help you answer it honestly.
Common Questions
Q. How is an Australian business valued for sale?
The core formula behind almost all SME valuations is: maintainable earnings (EBITDA) multiplied by a multiple, equalling a price. Maintainable earnings normalise for one-off costs and a fair-market salary for the owner; the multiple reflects the buyer’s view of how reliably those earnings will continue.
Q. What is a typical EBITDA multiple for an Australian SME?
For established Australian service businesses, current market reporting puts the typical range between three and six times normalised EBITDA. Manufacturing, software, and other categories sit in their own ranges. Position within the range is driven primarily by recurring revenue, owner independence, and the defensibility of the market position.
Q. What is maintainable EBITDA?
Maintainable EBITDA is the genuine, ongoing profit a new owner could realistically expect to inherit, calculated by normalising the reported EBITDA, removing one-off costs (legal disputes, redundancy payments, one-time consulting fees), and adjusting the owner’s remuneration to a fair-market salary for someone running the business.
Q. How does an earn-out work in an Australian business sale?
An earn-out is an additional payment the buyer makes after settlement, contingent on the business performing to agreed metrics over a defined period (typically 12-36 months). Earn-out and deferred-payment structures have increased materially in Australian M&A. They carry meaningful tax complexity. Sellers can be liable for tax on the market value of an earn-out at the point of sale, regardless of whether the contingent payments are eventually received, so engaging tax advice early is important.
