Business valuation and succession planning must go hand in hand when making your exit plan.
A fair and realistic valuation is the cornerstone of any succession. Without it, negotiations stall, financing structures collapse, and relationships strain.
Valuation is not only about setting a price for the founder’s shares. It also shapes:
- The affordability of repayments under vendor finance
- The level of bank or investor support
- Employee confidence that the deal is fair
- Tax implications for both founder and buyers
Getting valuation right provides certainty for everyone involved.
Value vs Valuation
It is important to distinguish between business value and a valuation.
- Value is the true, long-term strength of the business — the quality of leadership, culture, systems, and customer relationships.
- Valuation is the financial estimate of worth at a point in time, usually based on earnings and market comparables.
Succession planning must address both. A high valuation is meaningless if the underlying business cannot sustain payments. Likewise, a business with strong culture and systems will usually attract a premium multiple.
How SMEs Are Valued
In Australian SME transactions, three main methods are used:
- Earnings Multiple (EBITDA method)
- Most common. Value = Normalised EBITDA × Industry Multiple.
- Multiples usually range between 2× and 6× for SMEs, depending on sector, size, and risk profile.
- Discounted Cash Flow (DCF)
- Projects future cash flows and discounts them back to present value.
- More detailed, but highly sensitive to assumptions.
- Asset-Based Valuation
- Appropriate where tangible assets (property, equipment, inventory) dominate.
- Often used in capital-intensive or distressed businesses.
Often, valuations combine elements of these approaches.
Factors That Influence Multiples
What drives higher or lower valuations in succession deals?
Increase multiples:
- Recurring or contracted revenue
- Diversified customer base (no single client >15–20% of sales)
- Strong second-tier leadership team
- Documented systems and processes
- Clean financial reporting and governance
- Cultural stability and employee engagement
Reduce multiples:
- Heavy founder dependency
- Concentrated customer or supplier risk
- Poor financial records
- High staff turnover
- Unresolved disputes among owners or family members
The Hidden Risk: Founder Dependency
One of the biggest drags on value is over-reliance on the founder. Ask yourself:
- Would the business run smoothly if I took six months off?
- Are clients tied to me personally?
- Am I still the only one who can make key decisions?
If the answer is “yes,” the valuation will suffer. Buyers, banks, and employees know that businesses dependent on the founder are fragile. Reducing founder dependency before succession is one of the most effective ways to lift value.
Business Valuation and Succession Planning: Preparing for Valuation
Founders can take several steps to improve valuation before succession:
- Build and empower the leadership team.
- Systematise operations with processes and technology.
- Diversify revenue streams and reduce client concentration.
- Clean up financial reporting and separate personal expenses.
- Establish governance rhythms and an advisory board.
These improvements not only increase value but also make financing more feasible for employees or managers.
Coaching and Valuation
Valuation is not just a technical exercise. It is also an emotional moment for founders, who often overestimate or underestimate what their business is worth. Coaching helps owners face valuation with clarity — balancing pride in what they built with realism about market conditions.
Case Snapshot: Preparing for Value
A Sydney-based IT services company with $8m in annual revenue began planning for an MBO. An early valuation placed the business at a modest 3× EBITDA due to founder dependency and poor reporting.
Over two years, the founder delegated client relationships, implemented systems, and hired a CFO. A new valuation reflected a higher multiple, improving both the founder’s outcome and the bank’s willingness to support the MBO.
Lesson: Valuation is not fixed — it can be improved by addressing weaknesses in governance, systems, and leadership.
Key Takeaways When It Comes To Business Valuation and Succession Planning
- Valuation is the foundation of any internal buyout, shaping price, funding, and confidence.
- Australian SMEs are usually valued using EBITDA multiples, DCF, or asset-based methods.
- Multiples rise with leadership depth, recurring revenue, and strong governance.
- Founder dependency is a major risk that drags down value.
- Preparation — especially improving systems, leadership, and financial reporting — can lift valuation and make succession financeable.
- Coaching supports founders and successors in navigating the emotional and technical aspects of valuation.
Next Chapter: Funding Internal Buyouts
We will explore how internal successions are financed in practice, including vendor finance, bank debt, aligned capital, and innovations such as surety-backed guarantees.