Andrew Markou is the CEO and Co-Founder of BusinessesForSale.com. He has extensive experience in the business for sale market and the factors that influence valuation. He is also the author of A Pocket Guide to Buying a Business, which explains the acquisition process and explores how buyers can assess what a business is worth.
How much is a business actually worth?
The answer often depends on who you ask. An owner may have a price in mind, while a buyer examining the same company could reach a very different conclusion. What matters in the end is not either party’s initial expectation, but the value they can ultimately agree on.
With more than 30 years of experience helping owners take businesses to market in South Africa and internationally, we’ve seen that valuation is both an art and a science. Financial performance is central to the process, but a calculation alone cannot tell the whole story. The price a credible buyer is prepared to pay will also reflect risk, opportunity, market conditions and, ultimately, negotiation.
This guide explains how to value a business in South Africa, looking at the main valuation methods and the formulas behind them. We’ll also cover the financial information you’ll need, how to choose an appropriate method, some of the most common valuation mistakes and when professional input can be worthwhile.
Tip: to get started quickly, try BusinessesForSale.com’s ValueRight business valuation calculator.
How Do You Value a Business?
There isn’t one universal formula for calculating the value of a company. Earnings may be the most useful measure for one business, while assets, revenue, expected cash flows or comparable sales could provide a better indication for another.
For many profitable small and medium-sized businesses, however, this formula provides a useful starting point:
Indicative business value = Maintainable earnings × Appropriate valuation multiple
The focus should be on maintainable earnings rather than simply taking the latest year’s profit at face value. A buyer wants to know what level of earnings the company is reasonably capable of sustaining once the current owner has left.
The multiple requires more judgement. The company’s financial performance, risk, industry, market conditions and evidence from comparable transactions can all affect the figure. Negotiation between buyer and seller will play a role too.
Different businesses may therefore need different approaches. A company that owns significant property or machinery, for instance, cannot necessarily be assessed in the same way as a growing technology or professional services business.
What Information Do You Need to Value a Business?
Reliable information is the foundation of a credible valuation. Before trying to put a figure on a company, gather enough evidence to understand how it performs financially, what it owns and owes, and how secure its future income appears to be.
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Information |
Why it matters |
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Financial statements for at least three years |
Help establish revenue, expenses, profitability and performance trends |
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Recent management or interim accounts |
Provide a more current view of trading performance |
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Relevant company records |
Help verify important information about the business and its ownership |
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Balance sheets |
Show assets, liabilities, cash and debt |
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Cash flow statements |
Indicate how effectively reported profits are converted into cash |
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Owner remuneration and benefits |
Help establish the financial benefit currently received by the owner |
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Discretionary and once-off expenses |
Identify potential adjustments when calculating underlying earnings |
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Asset register |
Records property, machinery, vehicles and other important assets |
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Outstanding liabilities and debt |
Establishes the financial obligations attached to the company |
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Revenue by customer |
Reveals whether income is overly dependent on a few customers |
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Contracts and recurring income |
Help assess how predictable future revenue may be |
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Forecasts and sales pipeline |
Provide evidence of potential growth, although forecasts should be tested carefully |
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Leases, licences and intellectual property |
Identify important rights, obligations and intangible assets |
Buyers will normally examine much of this information during due diligence. Gaps in the records, unexplained expenditure or forecasts that don’t stand up to scrutiny can weaken confidence in both the valuation and the business itself.
What Are the Main Methods for Valuing a Business?
Although there are numerous valuation techniques, most fall into three general groups.
An earnings-based valuation looks at the financial return produced by the business. An asset-based valuation concentrates on the value of what the company owns after accounting for its liabilities. Market- and future-based approaches consider evidence such as comparable transactions or the cash the company is expected to generate in future.
The right approach depends on the business. No single method provides the most reliable answer in every situation.
Seller’s Discretionary Earnings
Seller’s Discretionary Earnings, usually known as SDE, can be particularly useful when valuing a smaller owner-managed business.
Reported profit doesn’t always show the full economic benefit an owner receives from a company. SDE adjusts the earnings figure to account for certain owner-related benefits and expenses, with the aim of estimating the total annual financial benefit available to one full-time owner-operator.
Possible adjustments include the owner’s remuneration and benefits, interest, depreciation and amortisation, legitimate discretionary spending and genuine once-off costs.
When Is SDE Most Useful?
SDE generally makes the most sense where the owner plays an active role in running the company and receives remuneration or other financial benefits from it.
Smaller retailers, restaurants, agencies, trades and service businesses are common examples. The method is particularly relevant if a buyer expects to take over the seller’s day-to-day role.
How Do You Calculate SDE?
A simplified calculation is:
SDE = Pre-tax profit + owner’s remuneration and benefits + interest + depreciation and amortisation + eligible discretionary expenses + non-recurring expenses
A suitable multiple can then be applied to the maintainable SDE:
Indicative business value = Maintainable SDE × SDE multiple
Suppose a South African marketing agency earns an annual pre-tax profit of R1,000,000. Its working owner receives R500,000 in remuneration, and another R100,000 in legitimate personal or once-off costs would disappear after a sale.
The resulting SDE would be:
R1,000,000 + R500,000 + R100,000 = R1,600,000
If comparable market evidence supported an SDE multiple of three:
R1,600,000 × 3 = R4,800,000
That gives you an indicative value of R4.8 million, but it isn’t a promise that someone will pay that amount. The appropriate multiple still needs to reflect factors such as growth, customer concentration, competition, owner dependence and the overall risk of the business.
EBITDA Multiple Valuation
EBITDA is another widely used measure, particularly for larger and more established companies.
The acronym stands for earnings before interest, taxes, depreciation and amortisation. Removing these items provides a way of looking at operating profitability before differences in financing, taxation and certain non-cash accounting charges.
Which Businesses Are Better Suited to EBITDA?
EBITDA is generally more applicable to established businesses with management structures that allow the company to function independently of one working owner.
This separates it from SDE. The SDE approach seeks to capture the financial benefit available to an owner-operator, whereas EBITDA does not simply assume that all owner remuneration can be added back.
How Do You Calculate EBITDA?
In simple terms:
EBITDA = Net profit + interest + tax + depreciation + amortisation
To estimate enterprise value:
Enterprise value = Maintainable EBITDA × Appropriate EBITDA multiple
Remember that EBITDA isn’t the same as cash flow. It doesn’t capture everything that affects the cash available to a business, including capital expenditure and changes in working capital.
Asset-Based Business Valuation
For some companies, earnings aren’t the most logical place to begin. An asset-based valuation instead looks at the value of the company’s assets after deducting its liabilities.
At its simplest:
Net asset value = Total assets − Total liabilities
Assets could include property, machinery, vehicles, inventory, cash and accounts receivable. Loans, unpaid expenses, tax liabilities and other debts would sit on the other side of the equation.
When Is an Asset-Based Valuation Appropriate?
This method is most useful when tangible assets represent a substantial part of what the company is worth. Manufacturing, agriculture, property-related businesses and companies with significant machinery or inventory are examples.
It can be less informative for businesses whose real value lies elsewhere. A strong brand, skilled employees, intellectual property, established customer relationships or the ability to generate future profits may be extremely valuable without being adequately represented on a balance sheet.
Book Value vs Market Value
Accounting records don’t necessarily tell you what an asset could fetch if it were sold today.
Machinery may have fallen considerably in value since it was purchased, while property could have appreciated. Inventory might include slow-moving or obsolete items, and some outstanding customer debts may prove difficult to collect.
A sensible asset-based valuation therefore considers fair market value rather than automatically accepting the figures recorded in the accounts.
What Is Liquidation Value?
Liquidation value asks a slightly different question: how much could be recovered if the company’s assets needed to be sold and its liabilities settled?
When a sale has to happen quickly, assets may realise less than they would through an orderly process. Liquidation value is consequently more relevant to distressed businesses than to healthy companies expected to continue operating.
Discounted Cash Flow Valuation
While the previous approaches rely heavily on what a company owns or has earned, discounted cash flow looks primarily at what it may generate in the future.
Discounted cash flow, or DCF, estimates future cash flows and discounts them back to their present value. The principle behind this is straightforward: R10 received today is worth more than R10 received years from now because today’s money can be invested and future cash flows carry risk.
A simplified formula is:
DCF value = [CF₁ ÷ (1 + r)¹] + [CF₂ ÷ (1 + r)²] + … + [CFₙ ÷ (1 + r)ⁿ] + discounted terminal value
Where:
- CF represents forecast cash flow for each period
- r represents the discount rate
- n represents the relevant period
Terminal value estimates the value attributable to cash flows beyond the explicit forecast period.
Which Businesses Are Suitable for DCF?
DCF tends to be most useful where future cash flows can be forecast with a reasonable degree of confidence. It is often better suited to larger or more established businesses where credible long-term forecasts are available.
Because the calculation depends on assumptions about future performance and risk, the result can change considerably when those assumptions change. That makes DCF less practical for businesses with volatile earnings or uncertain forecasts.
Which Business Valuation Method Should You Use?
The nature of the business should determine which valuation method provides the most useful starting point.
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Type of business |
Potential starting method |
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Small owner-managed business |
SDE multiple |
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Established company with independent management |
EBITDA multiple |
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Asset-heavy company |
Adjusted net asset valuation |
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Distressed or loss-making business |
Asset-based or liquidation valuation |
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Stable company with predictable future cash flows |
Discounted cash flow valuation |
You don’t necessarily need to rely on one method alone. Looking at a business in several ways can help test whether the resulting valuation is reasonable, and professional advisers may use a combination of methods and market evidence when reaching their conclusion.
What Is a Business Valuation Multiple?
A valuation multiple connects a measure of financial performance, such as SDE or EBITDA, to an estimated business value. For example, if comparable businesses have recently sold for between 2.5 and 3.5 times SDE, those transactions may provide a useful reference point for another company.
But finding genuinely comparable businesses is the difficult part.
Companies within the same industry can have very different margins, customer profiles, growth rates, recurring revenue, locations and levels of owner dependence. Those differences can materially affect what buyers are prepared to pay.
Information about private business sales can also be limited, so professional advisers may supplement available transaction evidence with sector research, specialist databases and their experience of other deals.
Geography adds another variable in South Africa. A business operating in Johannesburg, Cape Town or Durban may face a different buyer market, cost base and competitive environment from a similar company elsewhere in the country. Local economic conditions, access to customers, premises, workforce availability and the number of credible buyers can all affect demand.
Multiples should therefore be used as benchmarks, not rules. The figure only becomes meaningful when considered alongside the individual company’s performance, opportunities and risks.
Five Business Valuation Mistakes to Avoid
Even when the underlying valuation method is sound, mistakes in how it is applied can distort the result. Here are five to watch for.
Applying a Multiple to the Wrong Earnings Figure
SDE, EBITDA, net profit, revenue and cash flow aren’t different names for the same thing. A multiple needs to be applied to the financial measure on which it was based, otherwise the resulting valuation may be misleading.
Being Too Generous With Add-Backs
Adjusting earnings for legitimate owner expenses and once-off costs can be appropriate, but every adjustment should be supportable. A normal operating expense can’t simply be removed because doing so produces a higher valuation.
Letting One Year’s Performance Dominate
An unusually successful year can distort the picture if it isn’t sustainable. Looking at performance across several years makes it easier to distinguish a genuine trend from an exceptional period.
Double-Counting Operating Assets
An earnings-based valuation may already reflect the contribution made by the assets needed to operate the company. Adding their entire value again afterwards can mean counting the same economic benefit twice.
Confusing Valuation With the Final Price
The valuation is a reasoned estimate, not a guaranteed outcome. Due diligence findings, buyer competition, financing, negotiation and deal structure can all move the eventual selling price.
Can You Value a Business Yourself?
If your financial information is reliable, the methods in this guide can help you arrive at an initial valuation range yourself.
BusinessesForSale.com’s ValueRight business valuation calculator can also provide an initial indication of value.
There are circumstances where professional assistance is worth considering. A valuation connected to tax, legal proceedings, shareholder matters, succession or another formal purpose may require a more detailed assessment from an appropriately qualified accountant, business valuation professional or other adviser.
Finding the Right Value
There is no single calculation that can account for everything that makes one company more valuable than another.
Strong financial performance matters, but buyers also care about how dependable those earnings are and whether they can be maintained after the seller leaves. Recurring income, a broad customer base, capable employees, established systems, growth prospects and limited dependence on the owner can all make a business more attractive.
A credible valuation therefore combines good financial information with an appropriate methodology, relevant market evidence and a clear-eyed assessment of the company itself.
The objective isn’t to discover one supposedly perfect number. It’s to establish a valuation range that can be supported by evidence – and to understand why a buyer might ultimately pay more or less within that range.
Frequently Asked Questions About Business Valuation in South Africa
How Much Does a Business Valuation Cost in South Africa?
The price will depend on the size and complexity of the company, why it is being valued and the level of analysis required. An initial estimate may be inexpensive or free, while a comprehensive professional valuation will generally cost more.
Do I Need a Professional to Value a Business in South Africa?
Not always. You can estimate a business’s value yourself for initial planning, while formal, complex or high-stakes valuations may justify advice from an appropriately qualified professional.
Does Location Affect the Value of a Business in South Africa?
Yes. Local demand, property and labour costs, competition, economic conditions and the number of potential buyers can differ substantially across South Africa and may influence the price a buyer is willing to pay.