How to value a business nz: Putting a Price on a Business in New Zealand

It’s important to know how much your business is really worth, whether you’re planning to sell it, get money to grow it, or make a plan for who will take over when you’re gone. A precise business valuation in New Zealand gives you a clear, objective picture of how much your company is worth. This number is more than just a number; it’s a strategic tool that helps you make smart choices, negotiate well, and protect your financial future.

This comprehensive guide will walk you through the essentials of business valuation in the New Zealand context. We’ll look at the main ways that professionals value businesses, break down the most important things that affect a business’s value, and give you a step-by-step plan to follow. By the end of this article, you will know a lot about how to value a business in New Zealand and be better able to figure out how much your own business is worth.

Basic Ways to Value a Business

There is no one formula that works for all businesses when it comes to valuing them. Instead, professionals use a number of methods, often in combination, to come up with a number that is fair and can be defended. The first step in learning how to value a business in New Zealand is to understand these basic ideas.

1. The Earnings Multiplier Method (or Multiple of Earnings)

This is one of the most common ways to figure out how much a small to medium-sized business in New Zealand is worth. It’s not too hard and gives you a view from the market.

How it works: This method finds the value of a business by multiplying its earnings by a certain number. The number used for earnings is usually either the Seller’s Discretionary Earnings (SDE) or the Earnings Before Interest and Tax (EBIT).

• Earnings Before Interest and Taxes (EBIT): This is the total amount of money that one owner-operator makes from the business. You get it by adding back interest, taxes, depreciation, amortisation, the owner’s salary, and other personal benefits (like a company car or health insurance) to the net profit.
• The Multiplier: The industry, the size of the business, the risk profile, and the growth potential all affect this number. A business that is stable and low-risk with a good track record might have a higher multiplier (3–5x), while a business that is riskier might have a lower one (1–2.5x).

For example, think about a small cafe in Wellington that makes $150,000 a year. A multiplier of 2.5 is thought to be right based on recent sales of similar cafes in the area and the fact that this one has been doing well.

• Valuation = SDE x Multiplier Valuation = $150,000 x 2.5 = $375,000

A lot of people like this method because it shows what the market is willing to pay for a certain amount of cash flow.

2. The Discounted Cash Flow (DCF) Method

The DCF method is a more complicated way of looking at things in the future. It gives a business a value based on its expected future cash flows, which are then discounted to their present value. People often use this method for businesses that are growing quickly, are just starting out, or have earnings that aren’t always easy to predict.

How it works:

1. Predict Future Cash Flows: You need to guess how much free cash flow the business will have over a certain amount of time, usually 5 to 10 years. This means making guesses about how much money will come in, how much it will cost, and how much money will be spent on capital investments.
2. Find a discount rate: This rate takes into account the risk of getting the expected cash flows. Riskier businesses get a higher discount rate. The rate is usually the Weighted Average Cost of Capital (WACC), which is the cost of both equity and debt.
3. Calculate Present Value: The discount rate is used to “discount” each year’s expected cash flow back to its value today.
4. Find the terminal value: A terminal value shows how much a business is worth at the end of the forecast period, since it is expected to keep running after that.
5. In short: The final value is the sum of the present values of the expected cash flows and the present value of the terminal value.

The DCF method is very powerful, but it is also very sensitive to the assumptions it is based on. A minor alteration in the growth rate or discount rate can substantially influence the final valuation.

3. The Asset-Based Valuation (ABV) Method

This method finds out how much a business is worth by adding up the net worth of all its assets. It works best for businesses that have physical assets that are worth a lot, like real estate holding companies, construction companies, or manufacturing companies. It can also be used as a “floor value” for a business, which is the amount it would be worth if it were to go out of business.

How it works:
The formula is easy: Value = Total Assets – Total Liabilities.

The problem, though, is figuring out how much the assets are worth. The book value, or the value on the balance sheet, doesn’t always match the real market value.

• Assets that you can touch: These are things like cash, inventory, equipment, property, and money owed to you. You need to figure out what each one is worth on the open market. For instance, machinery could be worth more or less than what it was worth when it was new.
• Assets that aren’t physical: These can be hard to measure, but they are often very useful. They include things like goodwill, patents, trademarks, customer lists, and brand reputation.

The Asset-Based Valuation is not often used for service-based or profitable businesses because it doesn’t take into account the value of future earnings and goodwill.

Important Things That Affect Business Value in New Zealand

A business’s worth isn’t set in stone. The final number can be greatly affected by a number of internal and external factors. Here are some of the most important things to think about when doing business in New Zealand.

Factors Inside

• Performance in terms of money: Having consistent profits and strong, predictable cash flow is very important. A history of growth is highly attractive to buyers and investors. 
• Dependence on the owner: How much does the business rely on you, the owner? A business that doesn’t need you to be there every day is less risky and worth more. A capable management team and documented systems can greatly raise added value.
• Customer Base: A diverse and loyal group of customers lowers risk. Your business is probably worth less if a lot of your money comes from one client.
• Brand and Reputation: A strong brand reputation and goodwill in the market are two intangible assets that can raise the price of a product.
• Leases and Contracts: The terms of important contracts, like property leases and agreements with suppliers or customers, can affect value. Long-term, good contracts make things safer and more valuable.

Outside Factors

• Trends in the industry: Is your pitch getting bigger, staying the same, or getting smaller? Companies in growing fields, like technology or eco-friendly products in New Zealand, often get higher prices.
• Economic Conditions: The state of the New Zealand economy as a whole is very important. Interest rates, inflation, and how confident consumers are all have an impact on how well businesses do and how buyers feel.
• The level of competition in your market is important. A business is worth more if it has a unique market position or a strong competitive edge (a “moat”).
• Regulatory Environment: Changes in government rules, like those about business immigration to New Zealand or environmental standards, can affect how a business works and how much it is worth.

A Step-by-Step Guide to the Business Valuation Process

Let’s go over the steps you need to take to value a business now that you know the methods and factors.

Step 1: Figure out why you need the valuation

First, make sure you know why you need the valuation. Is it for a potential sale, securing a loan, a shareholder buyout, or for New Zealand immigration business investment purposes? The purpose will affect the method of valuation and the amount of detail needed.

Step 2: Get your financial papers together

You’ll need at least three to five years’ worth of detailed financial records. Profit and Loss (P&L) Statements are some of the most important documents.

• Balance Sheets
• Statements of Cash Flow
• Returns on Taxes
• A full list of debts and assets

Step 3: Make the finances normal

This is a very important step, especially if you are using an earnings-based method. “Normalising” means changing the financial statements so that they show how profitable the business really is right now. Some common changes are:

• Adding back the owner’s salary and personal expenses that are paid for by the business.
• Taking out one-time costs or income that aren’t part of normal business (like a big legal settlement or the sale of a big asset).
• Adjusting for costs that aren’t at market rates, like paying rent to a family member at a rate that is lower than the market rate.

Step 4: Pick the Right Valuation Method(s)

Choose the method or methods that work best for your business and the reason for the valuation. The Earnings Multiplier method is a great place to start for most small, profitable businesses in New Zealand. It’s usually a good idea to use more than one method to double-check. You could use an Asset-Based Valuation, for example, to set a minimum price.

Step 5: Do the maths

Use your normalised financial data to put the method(s) you chose into action. If you’re using a multiplier, look up recent sales of businesses like yours in your area and industry to find a good range. It can be hard to find a precise business valuation calculator for New Zealand, but you can make a simple template in a spreadsheet to do these calculations.

Step 6: Look over and improve

The number you get from a formula is only the first step. Think about the qualitative factors we talked about before, like how much the owner depends on the business and what the industry is doing. Based on these factors, should your business be at the higher or lower end of the valuation range? This is where professional judgement comes in.

When to Hire a Professional to Value Your Property

While it’s possible to get a rough idea of your business’s value on your own, there are times when hiring a professional is essential. 

• When buying or selling a business: An independent, professional appraisal gives you a solid, defensible reason to negotiate. It gives both the buyer and the seller confidence that they are getting a fair price.
• Disputes over taxes or the law: A certified professional’s formal valuation is often required by law in cases like divorce, shareholder disputes, or estate planning.
• Looking for a big investment: Before putting money into a deal, smart investors and banks will want a full and unbiased valuation.
• If your business is big, works in a niche market, or has complicated assets, you need the help of a professional.

A professional valuer can help you get information about the market and the industry that is hard to find on your own. It costs money to get a professional business valuation, but it can save you money in the long run and give you peace of mind.

Find Out More About How Much Your Business Is Worth

As a business owner, one of the most important things you can do for your finances is figure out how much your business is worth. You can get a lot of useful information about your company’s finances by learning about the main ways to value a business, knowing what affects its worth, and following a set process. This information gives you the tools you need to make your business more valuable and stronger, whether you’re getting ready to leave or grow.

Business Kiwi can help you get a clear, professional valuation of your business if you’re ready to go from guessing to knowing. We are experts at giving full business valuations that are specific to the New Zealand market.

Call us today to set up a private meeting and start finding out what your business is really worth.