How Much Is Your Business Worth? Goodwill, Working Capital & Property Explained

How Much Is Your Business Worth? Goodwill, Working Capital & Property Explained

"Sir, what's your business worth?"

Ask an MSME owner this question and you'll usually hear one of three answers: "My factory land alone is worth eight crore." Or, "Last year's profit was one crore, multiply by five — five crore." Or, "The bank gave me a four crore limit, so it must be worth at least that."

None of these answers are wrong. All three are incomplete. And then a buyer shows up with a consultant who starts talking about "EV/EBITDA multiples," "DCF," and "terminal value" — and the conversation stops making sense. The problem isn't that these methods are flawed. It's that nobody explains them in a language business owners actually use.

Here's the practical side of business valuation — the part that plays out at the deal table, not in a textbook.

Three Things Valuation Is Not

Land value is not business value. Land is an asset. A business is an earning machine. If your factory's walls stay standing but orders stop coming in, the land retains its value — the business's value collapses to zero. A buyer isn't purchasing your plot; if all they wanted was land, they'd buy a cheaper one in an industrial estate. They're buying a running, earning business.

Last year's profit times any multiple is not valuation. This is the most common mistake — someone hears "five times is standard" and simply multiplies. A multiple isn't a magic number; it reflects how risky the buyer perceives your business to be. Lower risk earns a higher multiple; higher risk earns a lower one. In MSMEs, risk usually comes down to promoter dependence — if the business wobbles the moment the owner steps away for two months, that's a high-risk signal to any buyer.

Your bank limit is not your value. A bank lends against security — stock, debtors, property. That has no direct relationship with your business's actual earning capacity.

Goodwill: The Payback Period Logic

Set aside the textbook definition. Practically, goodwill is the extra earning that doesn't come from machines and land alone — it comes from your name, your customers, your vendors, your team, and your systems. If someone bought identical machines and built an identical factory tomorrow, would they get your order volume from day one No — it would take them three or four years. That saved time is exactly what goodwill represents.

Here's how a buyer actually thinks about pricing it: they ask themselves, "The extra amount I'm paying — in how many months will I get it back?" That's the entire logic, known as the payback period. Across most MSME deals, goodwill practically works out to roughly 30 to 40 months of sustainable surplus profit — about two-and-a-half to three-and-a-half years.

Example — an auto components manufacturer: Turnover of 12 crore, with an average profit before tax of 1.80 crore over three years. A crucial adjustment most owners miss: if the owner doesn't draw a market-rate salary, the buyer will need to hire a professional to run the business — say, at 30 lakh a year. Subtracting that gives a sustainable surplus profit of 1.50 crore. Applying the payback range: at 30 months, goodwill works out to roughly 3.75 crore; at 40 months, roughly 5 crore — with land and building valued entirely separately.

Example — a trading business: Turnover of 8 crore, surplus profit of 40 lakh, but the business runs almost entirely on the owner's personal relationships with three major customers. Here, a buyer won't offer anywhere near 30 months — more likely 18 to 20 — because the fear is that those three customers walk the moment the owner exits.

The pattern is consistent: strong systems, a trained team, and written customer contracts support a longer payback (up to 40 months); heavy owner dependence shortens it (18–24 months). Worth noting — this isn't a statutory formula or an ICAI standard. It's a practical, experience-based observation of how buyers actually behave in the market, not a rulebook.

Working Capital: Where Most Deals Get Stuck

Working capital is simply stock, plus debtors, minus creditors. Owners often want this added to the sale value — "there's two crore of stock in my godown, add it in." Buyers push back just as reasonably — stock is what keeps the business running; it isn't a bonus.

The standard global practice resolves this: keep working capital out of the valuation number, and adjust it separately at closing. It works in two steps. First, enterprise value is agreed upon — say, 6 crore — assuming a normal (target) level of working capital comes with the handover, usually based on the trailing 12-month average. Second, on the actual handover date, actual working capital is measured against that target. If actual is higher, the seller receives the difference; if lower, the price reduces by the difference.

For instance, with a target of 1.80 crore: if actual working capital comes in 30 lakh higher, the seller receives 6.30 crore; if it comes in 40 lakh lower, the price drops to 5.60 crore. This mechanism protects the buyer from a seller stripping the business bare before handover, and protects the seller's own invested capital.

Two practical pieces of advice: define the working capital formula in the term sheet upfront — not on handover day — covering how slow-moving stock and aged debtors are treated, and never confuse working capital with goodwill. It's your own money tied up in the business, not extra value.

Property: Sell Together, or Keep and Rent?

For most MSMEs, land and building is the single largest asset — and owners hold significant negotiating power here that often goes unused. Property is valued using entirely different methods than the business itself: sales comparison (recent similar sales nearby), cost approach (cost to build afresh, less depreciation), and income capitalisation (potential rental income, capitalised at prevailing yield).

You have three legitimate options: sell the business and property together (simplest, but requires a larger cheque from the buyer); sell only the business and lease the property to the buyer (often the smartest option — you get the business value plus ongoing rental income, and the buyer's upfront investment drops); or sell only the property if the business itself has run its course. Whichever you choose, decide before meeting a buyer — otherwise, the buyer will decide it for you, in their own favour.

In Summary

Business valuation, at the practical level, comes down to three separations: your land isn't your business, your goodwill is priced by how fast a buyer expects payback, and your working capital settles separately from your headline price. Getting these three right before you sit across from a buyer changes the entire negotiation.

Disclaimer: This article is for general educational purposes only. The payback period range discussed is based on practical market experience, not a statutory or regulatory formula. Every business is different — please consult your CA or a registered valuer before making any decision regarding your specific case.

CA Dhiraj Ostwal & Associates — Chartered Accountant & Cost Management Accountant, 28 years of practice FC Road, Shivajinagar, Pune – 411004  +91-70200 45454 |  www.cadhirajostwal.com |  dhiraj@cadhirajostwal.com