The business you're building might be worth more than you think, but only if you know how to maximise it.

Right now, there are 35 buyers for every good business on the market in New Zealand, this should excite every business owner in the country. 

Thirty-five.

Yet most business owners are so focused on running their business day-to-day that they've never stopped to think about what it's actually worth. They're building an asset without understanding its value.

That ends today.

The Lotto Moment

When we sit down with a business owner and tell them their business could sell for a million dollars - tax-free - something magical happens.

Their eyes light up like a Christmas tree.

And why wouldn't they? Think about it: to earn a million dollars through salary, you'd need to earn $180,000 per year for over 8 years. 

But sell your business? Under current New Zealand tax rules, the capital gain on a business sale is tax-free. The whole million goes straight into your bank account.

That's not just exciting. That's life-changing.

The Question Every Business Owner Asks

When we start talking about selling, the first thing most business owners say is: "Do I even have a business that's worth selling?"

It's a fascinating question. And the answer, more often than not, surprises them.

We recently had a client share their screen on a Zoom call. We pulled up four years of P&L data and ran through some indicative numbers: a low, mid, and high valuation based on their financials.

The business owner's response? "Wow. This really validates that all the hard work and effort and stress hasn't gone in vain. I've built an asset that's worth something."

That moment when a business owner realises they've built something valuable is one of the most rewarding parts of what we do.

How Businesses Are Actually Valued

Let's get into the mechanics, because understanding this will change how you run your business.

The basic formula is straightforward: take your profit, add back certain expenses (called "add backs"), and multiply by a number (typically between 2 and 4 times based on current data).

But here's where it gets interesting, and where most business owners leave serious money on the table.

The Gross Profit Revelation

We were working through a client's P&L recently and noticed something alarming: their gross profit percentage had dropped by 5% compared to the previous year.

Five percent doesn't sound like much. But let's do the math.

If that 5% drop represents $100,000 in lost profit, and a broker applies a multiple of 3 to value the business, that single percentage drop has just cost you $300,000 on your sale price.

At the average multiple of 3.66, that's $366,000. Gone. Because you weren't watching your gross profit line.

The business owner's jaw hit the floor. "That's a f***ing eye opener."

It should be. Because that $366,000 is tax-free money that just evaporated because gross profit wasn't being managed efficiently.

The Two Worlds That Can't Coexist

Here's a tension we see constantly: business owners want to minimise tax, but they also want to maximise their sale price.

You can't do both.

If you're running a tax-minimised business,  driving profit down through legitimate expenses to reduce your tax bill, you're simultaneously decreasing your sale value.

We lean strongly toward maximising profitability. Here's why: it's always better to earn a dollar, pay 33 cents in tax, and keep 67 cents than to not have the dollar at all.

And when you sell? That 67 cents becomes a dollar because the capital gain is tax-free.

The Advertising Multiplier

Here's something that blew our minds when we saw it in a client's P&L.

Over four years, their advertising spend had steadily increased. In the most recent financial year, they were getting an $80 return for every $1 spent on advertising.

Eighty to one.

Now think about what that means for a sale. Advertising is a tax-deductible expense. So you're spending money that reduces your tax bill, while simultaneously driving up your top line, maintaining your gross profit, and increasing your sale value through the multiplier effect.

What Buyers Are Actually Looking For

When someone buys a business, they're buying certainty. They want to know that the income will continue after they take over.

So what makes a business attractive to buyers?

Consistent, growing sales. Year-on-year growth tells a story. Lumpy, inconsistent revenue raises questions.

Strong gross profit margins. This shows the business model works and isn't just buying revenue.

Clean, consistent accounting. If your books are a mess, buyers get nervous. Consistent coding and presentable financials build confidence.

A strong online presence. Google reviews, social media, website traffic: these validate the claims in your information memorandum. We recently did due diligence on a business with a massive online presence and found a "secret recipe" that was directly correlated to income. That's gold for a buyer.

Systems and processes. Can the business run without you? If you're the business, buyers will discount heavily for key person risk.

Cash conversion. How quickly does profit turn into cash? Businesses that collect quickly, turn stock fast, and pay suppliers efficiently are worth more than those with cash tied up in debtors and inventory.

The Google Reviews Hack

Here's a simple, free thing you can do right now to increase your business value: get more Google reviews.

We had a client who said getting reviews was "really hard." We asked if they were texting their clients. They weren't.

We gave them a template. One text message. Copy, paste, send.

The result? They went on a review-getting rampage. Because here's the thing: when a buyer reads your information memorandum and you claim to have a loyal customer base, they're going to check your Google reviews to validate that claim.

If your nearest competitor has 50 reviews and you have 200, that's a compelling story. If you have 10 and they have 200, that's a problem.

The Timing Question

When is the right time to plan to sell?

Ideally 12-24 months before you want to exit.

Here's why: brokers typically use three years of financial data to value a business. If you want to maximise your sale price, you need at least two years of strong performance to show buyers.

We've seen clients who wanted to sell during the recent recession. Our advice? Wait. The business wasn't going to value up in that environment, and selling at a discount doesn't make sense if you have time on your side.

But here's the flip side: we also had clients who decided to sell even though they could have waited. Their reasoning? They didn't know what the next 18 months would bring. The numbers were good. The deal stacked up. They decided to de-risk and take the money off the table.

There's no perfect information. Sometimes the right time to sell is when the deal makes sense, not when conditions are perfect.

The Business vs Property Debate

We think business beats property every day of the week.

Property investors buy rentals with negative cash flow, hoping for tax-free capital gains on the sale. Business owners generate strong cash flow AND get tax-free capital gains on the sale.

You get both. Property investors get one (maybe).

And yet we have clients who want to invest in commercial property to save tax. We tell them the same thing every time: wouldn't you rather keep the dollar, pay 33 cents in tax, and keep 67 cents? Why spend a dollar to save 33 cents?

What to Do Right Now

If you're a business owner reading this, here's your action plan:

1. Get a valuation. Even an indicative one. Know what you're building.

2. Focus on gross profit. This is the single biggest lever for increasing your sale value. A 5% improvement could be worth hundreds of thousands.

3. Increase your advertising. If it's working (and you should know if it is), spend more. The multiplier effect on your sale price makes it one of the best investments you can make.

4. Build your online presence. Google reviews, social media, website. These validate your story to buyers.

5. Clean up your books - Consistent coding, clear financials, explainable add backs. Make it easy for buyers to understand your business.

6. Think about systems. Can your business run without you? If not, start building the processes that make it possible.

7. Start thinking about timing. If you might want to sell in the next 3-5 years, start preparing now. Don't wait until you're burnt out and desperate.

The Bottom Line

Your business is an asset. Probably a more valuable one than you realise.

But it's only worth what someone will pay for it. And what someone will pay depends on how well you've built it, how well you've documented it, and how well you've positioned it for sale.

The good news? You're in complete control of all three.

Most business owners spend their careers focused on revenue and income. The smart ones focus on building an asset that someone else will pay a premium to own.

Which one are you?

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Thinking about buying or selling a business? At Next Advisory, we help you figure out what a business is really worth and guide you through the process with confidence. Visit https://nextadvisory.nz to book a time to chat.

Checkout more of our blog content at https://nextadvisory.nz/podcast