Stable business, different price: What you need to understand about valuing your business

Many business owners assume that if their performance is stable, its value should be too. However, in today’s market, that assumption can be misleading.

A business can come through a year looking much the same as it did twelve months earlier. Trading may be broadly in line with expectations, customer relationships intact and no clear operating signal that the business has become materially better or worse. Yet the valuation can still move in a way that feels difficult to reconcile with the owner’s experience.

Anupam Pandey, Associate Director Deals Advisory for BDO Auckland shares what business owners need to know about valuing their business and what to consider looking ahead. 

Why a valuation can move when performance has not

Three common factors underpin every valuation:

1. The cash flow the business is expected to generate.
2. The timing and reliability of that cash flow.
3. The return buyers and investors require for taking on risk.

 

“Owners can influence the first two factors through how they run the business. The third is set by the market, and it has done much of the moving over the past few years.” 

It helps to think about valuation risk in two categories.

• Business-specific risk includes the factors an owner can influence, such as margins, customer concentration, management depth, cash flow visibility and the quality of earnings.
• Market-wide risk sits outside the business. This includes interest rates, funding costs, buyer appetite, sector confidence and the level of certainty investors need before they are prepared to pay for future earnings.

 

What's changed in New Zealand

The past few years have made that distinction unusually visible in New Zealand. The Official Cash Rate moved from 0.25% in 2021 to 5.50% by May 2023, and bank funding costs followed. For example, a business generating the same $5m of sustainable EBITDA might have attracted a higher earnings multiple in 2021 than it did in 2023. The business may have been earning what it had earned before, but the return a buyer is required to hold those earnings had increased, as had the cost of debt funding a transaction. The result can be a materially lower enterprise value, even where operating performance is broadly unchanged.
 

“This effect can be sharper in New Zealand than in deeper markets, because many private businesses operate in relatively narrow sectors and rely on funding conditions that can shift faster than the business itself. A company may keep doing what it has always done, but if customers become more cautious, banks tighten credit appetite or offshore demand becomes less predictable, the same forecast may be viewed with less confidence. In simple terms, the discount rate reflects the level of confidence buyers or investors have in future earnings.”

This is why transaction multiples can look disconnected from individual company performance. A business that meets its budget may still attract a lower multiple than it would have a few years earlier, while another may improve in value on only modest trading gains because buyers have grown more confident about the outlook. In both cases, the multiple reflects confidence in future earnings as much as it reflects the latest set of accounts.
 

What owners can control

For many business owners, the most useful valuation discussion is often less about the headline earnings figure and more about the quality and sustainability of those earnings. One business may have earnings that look resilient because profit margins have held steady through a difficult trading period. Another may report the same earnings but need ongoing capital investment just to stand still. A third may be growing, but the cash required to fund that growth may leave shareholders with less value than the revenue line suggests.
 

“Owners cannot control the market, but they can strengthen the evidence buyers, lenders or investors use to assess the business. Practical steps include improving forecast accuracy, reducing reliance on a small number of customers, strengthening management depth, maintaining clear margin analysis, documenting recurring revenue and being able to explain the capital required to support growth.”

 

What owners should monitor

Owners should also track valuation conditions separately from operating performance. This includes funding costs, buyer appetite, sector confidence, bank credit appetite, customer demand and the broader economic outlook. These factors may sit outside the business, but they can materially affect what the market is prepared to pay for the same level of earnings.

 

What this means for valuation conversations

A lower valuation does not always mean the business has gone backwards. Equally, a higher valuation does not always mean the business has materially improved. A business can be genuinely stable year on year, but when the market’s view of risk changes, the valuation can change with it. Knowing which factor has moved is what separates a useful valuation conversation from one that may just feel unfair.
 

“The most valuable part of a valuation is often the conversation behind it. For business owners, understanding why value has moved, what is within their control and where the market is applying risk can be just as important as the final figure.”

 

How BDO can help

Whether you are considering independent valuations for the sale of a business or internal share transfers, due to new accounting standards for financial reporting or tax purposes, or to inform commercial strategy, we can help you objectively assess your business opportunities and risks. 

BDO’s Deal Advisory team can help with:

• Business valuations
• Purchase price allocations
• Independent expert reports
• Intangible assets valuation
• Employee share and option plans
• Impairment testing