How to Value a Service Business for Sale
How to value a service business for sale when profit only exists because you are in it. Here is the plain process buyers use.
You've been saying you'll sell in two or three years. You mean it. Then you think about who clients will ring in the first week after you're gone, and you know the answer. If you're working through how to value a service business for sale, start there. Not with a number someone threw out over coffee.
Table of Contents
- You Want to Sell and the Business Is Still You
- How to Arrive at Profit a Buyer Can Keep
- What Happens to the Price When You Step Out
- Three Tests Buyers Use on a Service Business
- The File That Stops the Price Falling Later
- Count Another Year Before You List
You Want to Sell and the Business Is Still You
A broker mentions a multiple of profit. A mate in a similar firm mentions a bigger one. You run the sum on last year's result, then picture the first month after settlement. A key client rings your mobile. The team holds a job because only you can approve it. A new enquiry comes through someone who knows you personally.
A buyer is paying for profit that continues after you leave, not the work you did to produce last year's result. The valuation starts by finding out what it costs to take you out of the middle.
Why a Strong Year Can Mislead You
If you produced a strong year by selling, delivering and fixing problems at night, a buyer needs paid people to take over. Those wages reduce the profit available to value. Client loyalty and delivery know-how held only in your head create another risk: the buyer may not be able to keep them.
Work out maintainable profit, test its dependence on you, then consider a multiple. Our guide to business systems and processes (opens in new tab) covers how to get work out of your head and into a form the team can follow. Your accountant can confirm the formal numbers and tax treatment; you need to show how the work gets done.
How to Arrive at Profit a Buyer Can Keep
A buyer will rebuild your profit figure from the accounts and check each adjustment. Follow the same trail.
The Steps in Order
- Pull at least three years of accounts. Use five if results swing. Read the monthly profit and loss, not just the tax return, to see the trading pattern. If those reports are unfamiliar, start with how to read a profit and loss statement (opens in new tab).
- Strip out one-offs. Remove income that won't recur, such as an exceptional project, and costs that won't recur, such as a one-time repair. Keep the evidence for both.
- List your personal costs. Record private vehicles, personal spending and family wages that don't reflect a real market role separately. Avoid a single rounded adjustment.
- Give every add-back a reason. Add a cost back only if it is private or genuinely one-off. A cost the business still carries after completion stays in the accounts.
- Replace your drawings with a market wage. List the selling, managing, delivery and approval work you do. Price a capable replacement at market rates, regardless of what you chose to draw.
- Separate cash and debt that aren't part of trading. Surplus cash and non-operating debt affect the sale calculation, but shouldn't distort maintainable profit.
- Reconcile the messy middle. Check debtors, work in progress, fees billed in advance and staff leave owed. The buyer needs to know what has been earned, billed and inherited.
- Write down what's left. Use that working maintainable profit figure for the valuation, not the best year or the tax return figure.
What the Buyer Will Ask For
| Item | What to do | What the buyer will ask for |
|---|---|---|
| One-off income | Remove from the base year | Contract or invoice showing it will not recur |
| Private or personal costs | Add back | Ledger detail showing a private purpose |
| Owner drawings | Replace with a market wage for the operating job | Role description and market salary evidence |
| Family wages not in market roles | Restate at a market rate | Payroll records and a job description |
| Unusual legal or repair costs | Add back only if genuinely one-off | Invoices and a plain explanation |
| Work in progress and fees billed in advance | Adjust the working capital | Billing ledger reconciled to the accounts |
The ATO market valuation guide (opens in new tab) requires the methodology, inputs and assumptions to match the purpose of the valuation, and calls for impartial judgement about the reliability of those inputs. An adjustment needs evidence, not just a story about why profit looked low.
Practical rule: If you can't explain an adjustment to a stranger and show the paper behind it, leave it out.
Ask your accountant about tax treatment, structure and what sits inside the sale entity. Check that each adjustment also reflects how the business will operate after completion.
What Happens to the Price When You Step Out
Start with the profit figure you've built. Identify the work and relationships that still sit with you, then cost the handover honestly.
Walk the Bridge in Order
- Name everything that still sits with you. Record decisions and client relationships by name, not broad category.
- Put a wage on replacing you. Use a realistic market rate, whether the work goes to one person or several.
- Check whose name the work is in. Note whether clients contract with the company and who they actually rely on.
- Sort repeat work from pitched work. Use billing and client records to show what returns without a fresh pitch.
- Restate the profit. Deduct replacement wages and other identifiable gaps.
Where the buyer can't verify that bridge, they may discount the price, lengthen the handover, hold money back or make payment depend on clients staying through an earn-out. Personal reputation may have built the business, but it does not transfer just because a contract is signed.
Do the Sum with Your Own Diary
Use your own records to check the assumptions:
- Your hours in delivery. How much client work would someone else need to be paid to do?
- Your share of the fees. Which clients deal with you rather than the business?
- Your last proper break. Did the business trade without daily calls, approvals or fixes from you?
Then test a downside: your largest client leaves, or you pay market wages for delivery you currently do yourself. The result shows how sensitive your price is to the profit figure beneath the multiple.
Pull evidence of recurring revenue from contracts or repeat billing and client retention across years. A diary shows where to look; records show a buyer what has actually happened.
Three Tests Buyers Use on a Service Business
Use the three indications side by side. None is a sale price on its own.
| Test | What it uses | When it helps | Limit |
|---|---|---|---|
| Market comparison | Similar firms listed or recently sold | A sense-check against real asking and sale evidence | An indication only. Asking prices are not completed sales |
| Return on maintainable profit | Profit a buyer can keep repeating after completion | A profitable service firm expected to keep trading | One strong year is not maintainable profit, and turnover is not the base |
| Net asset value | Assets minus liabilities, tangible and identifiable intangible | A floor when plant, property or other assets matter | Equipment and debtors are not the sale price of a client business |
How to Use Each One
Market comparison is a sense-check against comparable firms. Distinguish a completed sale from an advertised asking price: one records what a buyer paid; the other records what a seller wants.
The return test uses maintainable profit, not turnover. Turnover shows the volume of work, not what remains after delivery costs. For a trading service firm, this is often the most useful test.
Net asset value subtracts liabilities from assets. It is a useful floor where plant, vehicles or property matter, but it can miss the value of a service firm's clients and people.
What the Listed Numbers Actually Mean for You
Owners sometimes get quoted big multiples from the share market. Those figures come from large, diversified, liquid, systemised companies whose shareholders can sell tomorrow. A buyer of an owner-run firm cannot do that. Treat share-market multiples as a ceiling for the very top of the market, not a guide to a business like yours. If someone quotes them without that warning, ask what they're selling.
Where Your Multiple Moves
- Moves it up. Recurring revenue under contract, clients who stay, documented processes and clear monthly accounts.
- Moves it down. Fees concentrated in a few clients, uneven earnings, weak records and work that stops when you stop.
Compare the indications rather than averaging answers that are far apart. Investigate the difference and ask your accountant to confirm the profit figure used in the return test.
The File That Stops the Price Falling Later
A price can change during due diligence when a buyer asks for records you cannot produce. Build the file while there is still time to put gaps right.
What Goes in the File
- Clean monthly accounts. Cover every year used to support the price.
- A one-page add-back schedule. Give each adjustment its own line and keep supporting documents ready.
- Contracts in the entity's name. Record renewal dates and who will own each client relationship after handover.
- A simple operating map. Show who sells, prices, delivers and approves work.
- Staff tenure and decision rights. Record who has stayed and what they can approve without you.
- Recurring fees split from one-off work. Make the repeat billing visible.
- Your largest clients as a share of fees. Calculate the concentration from your own records.
The Pitfalls That Cost You
The ATO ruling on goodwill (opens in new tab) states that goodwill requires sufficient assets, including goodwill, to allow the purchaser to carry on the vendor's business without interruption. Keep that test in mind as you check the file.
- Capitalising your unpaid job. Account for the market cost of the work you still do.
- Calling personal reputation goodwill. Show how clients and relationships will stay with the business.
- Treating asking prices as sales. Look for completed transactions where possible.
- Leaving billed work unreconciled. Tie fees billed in advance and work in progress to the accounts.
- Confusing business value with your cheque. Account separately for debt, surplus cash and the working capital left at completion.
Prepare two outputs: a range for the business and a bridge to the completion cheque. The second shows how the sale terms affect what you receive.
Count Another Year Before You List
Before speaking to a broker, use your accounts, diary and client list to identify what still depends on you. Another year can help if you use it to transfer decisions and relationships. Another year of unchanged habits leaves the same risks for a buyer to price.
Count the work involved in a business exit strategy (opens in new tab) before listing, not after an offer exposes the gaps.
The First Thing That Changes It
Start with the maintainable profit calculation. Then move one routine decision to a named person with a written standard, and check whether the handover works. Repeat with the next decision and the next client relationship. You need evidence from ordinary trading, not a promise made at the point of sale.
The Business X-ray is a free diagnostic session with Glenis. You go through your actual numbers together and look at where profit may be leaking and where the business depends on you. There is nothing to prepare and no obligation. It is a conversation, not a pitch. To start, book a call (opens in new tab).
If you would rather begin on your own, get the Momentum Starter Pack (opens in new tab) and work through your figures before discussing multiples.
Stop Knowing. Start Doing.
Glenis Gassmann is an Implementation-Driven Business Advisor on the Gold Coast, working with established business owners across Australia and New Zealand. Author of Why Knowing Isn't Enough, a number one Amazon new release.
When profit is unclear and routine decisions still land on your desk, knowing an estimated multiple does not tell you what to change. Start with the numbers and the work you still carry, then give a buyer a business they can assess on its own. Visit Your Success Shift (opens in new tab) to book a call.
Topics
Sell a business, Owner dependency, Maintainable profit, Business sale
