There are roughly nine months until 1 July 2027, which raises a useful question for established business owners: if you needed to know what your business was worth at that point, how confident would you be in the number?
You may already have an idea of what your business is worth, based on an industry multiple, the sale of a similar business, interest from a potential purchaser or a conversation with your accountant. These can provide a useful indication, with the financial and commercial information behind the business helping to explain how that value has been reached.
The 1 July 2027 CGT changes give some business owners a timely reason to look at this more closely. For certain businesses and business interests, value around the transition date could become relevant in the future, bringing greater attention to the position of the business at that time and the information available to explain it.
What Do the 1 July 2027 CGT Changes Mean for Your Business Value?
Treasury confirms that the new CGT arrangements apply prospectively to relevant capital gains accruing from 1 July 2027. For certain assets held across the transition, the enacted legislation includes provisions for determining the portion of a gain relating to the periods before and after that date (Treasury’s explanation of the CGT changes)
Depending on the relevant provisions, market value immediately before 1 July 2027 may form part of that calculation. An alternative method for apportioning the gain is also available in certain circumstances. (Enacted legislation on the Federal Register of Legislation)
The existing four small business CGT concessions remain subject to their eligibility requirements. From 1 July 2027, the turnover threshold for the 50% active asset reduction will increase from $2 million to $10 million (Treasury’s small business CGT explainer).
How the changes apply will depend on the owner’s circumstances and the asset involved. For owners who may be affected, the lead-up to 1 July 2027 provides a useful opportunity to get a clearer picture of the business and the factors influencing its value.
What Could Influence Your Business Value at 1 July 2027?
The value of an established private business reflects its earnings, future outlook and the risks within the business. Understanding these areas helps build a clearer picture of the business at a particular point in time.
A profitable business may have two customers accounting for half of its revenue, creating an exposure if either relationship changes. The financial results provide part of the picture, with customer concentration helping to explain the level of certainty around future earnings.
Growth expectations also need a clear basis. Contracted work, an established pipeline and a history of converting opportunities into revenue can help substantiate forecasts. The assumptions behind future demand, margins and growth provide further context around the outlook of the business.
The owner’s involvement can also influence value. Customer relationships, sales activity or important operational decisions may depend heavily on the owner, which can affect the sustainability of earnings if their involvement changes.
These areas help explain how the business generates its earnings, where the main risks sit and what may influence future performance.
The ATO’s market valuation guidance states that valuations for tax purposes should use the most relevant and reliable information known, or reasonably foreseeable, at the valuation date. It also highlights the importance of appropriate valuation methods, credible evidence and records explaining how the valuation was reached. (ATO’s market valuation guidance)
For an established private business, having current financial and commercial information can provide a clearer basis for establishing value if it becomes relevant at a particular date.
What Can Business Owners Review Before 1 July 2027?
The nine months leading up to 1 July 2027 give business owners time to develop a clearer and more current picture of their business.
Financial performance is a useful place to start. Recent results can help show the earnings being generated by the underlying business, including the effect of unusual income, one-off costs or changes in margins.
Revenue also deserves attention. Customer concentration, the strength of key relationships and the amount of contracted or recurring work can help explain the visibility of future earnings and where the main exposures sit.
Owner dependence should form part of the review, particularly where customer relationships, sales, pricing or operational decisions rely heavily on the owner. Identifying these areas can clarify how responsibilities are distributed across the business and how its earnings are generated.
Contracts, pipeline and forecasts provide further insight into future performance. Growth assumptions can be reviewed against actual results over the coming months as contracts are renewed, new work is secured and forecast revenue moves through the business.
Systems and processes contribute to the overall picture as well. Important knowledge or responsibilities may currently sit with particular individuals, giving owners time to document key processes and develop a clearer record of how the business operates.
Industry conditions, regulation, staffing and other commercial risks should also be understood because they can influence future earnings and the outlook for the business.
The value of the next nine months comes from the opportunity to see how these areas develop. Contracts may be renewed or lost, margins may change, customer concentration may shift, management capability may develop and forecasts can be tested against actual performance. Keeping this information current creates a clearer picture of the business as 1 July 2027 approaches.
A formal valuation may not be necessary today, but having clear, current and well-documented information about the business can make it easier to establish its value if the need arises later.
What Does a Business Valuation Need to Be Based On?
A recent AS Advisory valuation of a large NDIS provider shows how the available information can shape the valuation approach. The business was forecasting significant growth, so AS Advisory tested the assumptions underpinning those forecasts and considered the information available about its expected performance.
The forecasts were subsequently adjusted, and the valuation approach developed as the growth outlook became clearer. The methodology reflected the evidence available, the growth profile and the circumstances of the business.
This principle is central to AS Advisory’s approach to business valuation. We consider financial performance and sustainable earnings in the context of customer concentration, owner dependence, forecasts, industry conditions, commercial risks and the assumptions underpinning future performance.
The characteristics of the business, the purpose of the valuation and the information available at the relevant date then inform the methodology used. This creates a reasoned basis for the valuation and helps explain how the conclusion has been reached.
Do You Need a Business Valuation Before 1 July 2027?
Whether a formal business valuation is needed before 1 July 2027 will depend on the owner’s circumstances, the asset involved and the purpose for which the value may be required. The CGT changes do not create an automatic valuation requirement for every business owner.
An indicative assessment can help an owner understand the current position of the business and the factors influencing its value. A formal valuation may be appropriate where a value needs to be established for a particular purpose, with detailed consideration given to the information, assumptions, valuation date and methodology.
For some owners, the coming months can be used to prepare the business information that may become relevant later. Reviewing financial results, contracts, forecasts, customer relationships and owner dependence can build a clearer picture of the business as 1 July 2027 approaches and provide a sound foundation if a formal valuation is required.
How Well Do You Understand Your Business Value?
With 1 July 2027 approaching, this is a useful time to consider how well you understand your business value and the factors contributing to it.
AS Advisory’s Business Valuation and CGT Changes Scorecard provides an initial assessment across financial performance, customer concentration, owner dependence, systems and business readiness. It can help identify areas that are already well understood and those that may benefit from greater clarity before 1 July 2027.
See How Ready Your Business Is for the 1 July 2027 CGT Changes
For businesses requiring a more detailed assessment of their circumstances or business value, book a confidential conversation with AS Advisory.