How do you value a business for sale or succession?
A business is not valued based on how much effort the founder put into it, nor what it cost to build. A business is valued based on the future profit and cash flow it is expected to generate for the new owner.
Financial professionals use specific mathematical models to estimate this value. For small to medium businesses in South Africa, the most common approach is applying a multiplier to the company’s normalised annual earnings.
Method 1: the earnings multiple
The earnings-multiple approach is the standard for valuing profitable, trading businesses. The core formula relies on two variables: Normalised Profit × Industry Multiplier = Value.
To see the maths in action: if a business generates R1.2 million in normalised profit and the industry standard dictates a 3× multiple, the baseline valuation is R3.6 million. The negotiation between buyer and seller then focuses on why that multiple should be pushed slightly higher or lower.
Normalising the numbers
The profit figure shown on a tax return is rarely the true earning power of a small business. Owners often run personal vehicle expenses through the company or pay themselves salaries that are above or below market rates.
Before applying a valuation multiple, accountants "normalise" the profit. They add back one-off legal fees or abnormal repair costs, and subtract a standard market salary for a general manager if the owner was working for free. The resulting figure, often referred to as EBITDA, represents the true cash-generating ability of the business operations.
What drives the multiplier up or down?
The multiplier is a direct reflection of risk. A buyer pays a higher multiple for certainty and stability. While a standard small business might attract a 2× to 4× multiple, that number shifts based on the mechanics of the company:
- Recurring revenue: businesses with long-term contracts or subscription income secure higher multiples than those that start every month at zero.
- Customer concentration: if 60% of the revenue comes from a single client, the risk is massive. A diverse client base pushes the multiple up.
- Owner dependence: if a business relies entirely on the founder’s personal relationships to win sales, the revenue might disappear when the founder leaves. Businesses that run on documented systems with capable management teams fetch premium valuations.
Method 2: net asset value (NAV)
The NAV approach calculates value purely based on the balance sheet: the fair market value of the company’s assets minus its total liabilities.
This method is primarily used for asset-heavy operations (like property holding companies or manufacturers) or when a business is being wound down and liquidated. It generally produces the lowest valuation figure because it completely ignores goodwill — the intangible value created by a loyal customer base, a strong brand, and efficient operating systems that make the assets profitable.
Method 3: discounted cash flow (DCF)
The DCF model is a highly technical, forward-looking method favoured for larger corporations or startups with rapid growth trajectories.
Instead of looking backward at historical profit, it forecasts the free cash flow the business will generate over the next three to five years. It then mathematically discounts those future cash flows back to their present value today, factoring in inflation and the cost of capital. Because it relies heavily on future assumptions, a minor tweak in the projected growth rate drastically alters the final valuation.
Valuations in succession planning
A formal valuation is not only used for external sales; it forms the mathematical foundation of succession planning between partners.
In a buy-and-sell agreement, business partners take out life insurance on one another. If a partner dies, the policy pays out a cash lump sum, providing the surviving partners with the exact liquidity needed to buy the deceased’s shares from their grieving family.
The amount of life cover is directly pegged to the valuation. If a business grows substantially over five years but the partners fail to update the valuation and the insurance cover, a death leaves the surviving partners short on cash. This scenario forces the deceased’s family to remain trapped in a business they do not want, or forces the survivors into heavy debt to fund the buyout shortfall.
The tax consequence of selling
When an owner eventually sells their shares or the business assets, the transaction triggers a tax event. The profit made on the sale — the difference between what the owner originally invested (the base cost) and the final sale price — is subject to Capital Gains Tax (CGT).
Individuals selling a small business may qualify for a specific small business CGT exclusion if they meet strict criteria (such as being over 55 years old and the total business assets falling under a statutory threshold), providing significant tax relief upon retirement.
Terms used on this page
- EBITDA
- Earnings before interest, taxes, depreciation and amortisation — a measure of a business's raw operating profit, used as a base for valuations.
- assets
- What you own that has value — property, savings, investments, retirement funds, a business.
- liabilities
- What you owe — the bond balance, vehicle finance, loans, credit cards, store accounts.
- goodwill
- The intangible value of a business above its physical assets — built from brand reputation, customer loyalty and operating systems.
- inflation
- The rate at which the general prices of goods and services in an economy increase over time.
- buy-and-sell agreement
- A signed agreement between co-owners, funded by life policies they hold on each other, that binds the survivors to buy a deceased owner's share at an agreed value — so the family gets cash instead of an illiquid stake.
- base cost
- What an asset cost you in SARS's eyes — the purchase price plus qualifying costs like transfer fees, broker charges and improvements. A capital gain is measured from here.
Reviewed July 2026