Why your valuation conversation needs to start now

By Fiona Ettles, Partner at FinConnect

From 1 July 2027, the 50% CGT discount for individuals, trusts, and partnerships will be replaced by cost base indexation and a 30% minimum tax on capital gains. The legislation has now passed parliament, and for owners of accounting and financial planning practices, it changes the math on any future sale or succession.

The growth your business has achieved up to 30 June 2027 can still be taxed under the 50% discount. Growth after that date falls under the new rules. That makes 30 June 2027 one of the most important valuation dates practice owners will face.

And it is now a little over eight months away.

Demand for valuations around that date is already building. If you're weighing up your position, now is the time to start the conversation, because there is still time to lift the value of your business before that date.

What the change means for practice owners

The new rules split any future gain as of 30 June 2027, so you need to be able to show what your business was worth on that date. Without that evidence, you lose the ability to separate the growth that qualifies for the old discount from the growth that doesn't.

How this plays out depends on how you came to own your practice. If you started from scratch, you may have a nil cost base. Under the old rules, the 50% general discount applied to the whole gain on sale; under the new rules, that nil cost base is the starting point unless a value is set at 30 June 2027.

If you bought a base along the way, the old approach was to deduct the purchase price from the proceeds and discount the balance by 50%, while the new rules index the cost of that acquisition. If you bought into an existing firm at market value, the discount applies up to 30 June 2027, with indexation (or the ATO's calculation tool) from that date.

In every one of these situations, a value set at 30 June 2027 gives you the same thing: the discount on growth up to that date, and a clear starting point for indexation from then on.

A hypothetical example

Consider a financial planning practice built from scratch, so its cost base is nil. It's worth $3 million on 30 June 2027, and the owner sells it two years later for $5 million.

Under the old rules, the 50% general discount and the small business concessions would bring the tax on that sale to around $225,000. Under the new rules, with no valuation in place, the same sale would attract around $600,000. With an independent valuation at 30 June 2027, the $3 million of growth up to that date keeps the discount, and only the $2 million earned after it falls under indexation. In our example, that one valuation delivers a six-figure tax saving.

This example is hypothetical. It assumes tax at a minimum of 30%, access to the active asset reduction and retirement exemption, and no 15-year exemption.

Getting the timing right

The closer your valuation sits to 30 June 2027, the better it will protect you. Under CAANZ guidance, a retrospective valuation completed within six months of the date is generally fine. Beyond 12 months to two years, confidence drops, and the valuation may not hold up in an ATO audit.

The hard part is the contemporaneous qualitative review, which captures how the business actually looked and performed at that point in time. That is far easier to do well when you engage early, gather the information in advance, and complete the valuation as close to 30 June 2027 as possible.

Why the valuer matters

The highest defensible valuation at 30 June 2027 reduces the capital gains tax you'll pay in the future, so the quality of the valuation matters as much as its timing. A valuer who specialises in financial services will apply a realistic revenue run rate, benchmark adviser salaries against the market, and weight the valuation to your most recent year rather than averaging across several.

Getting these inputs wrong can understate your value, and that understated value then becomes the cost base you carry into the new system.

Watch for the sleepers

The small business CGT concessions remain in place, but several conditions can catch owners out over the coming years. Keep an eye on the $6 million net asset value test, and on whether you will stay under the turnover thresholds for the concessions. Consider whether the 15-year exemption will remain in its current form, whether you are likely to sell shares or business assets, and whether you will remain a significant individual in the business. Each of these can shift your tax position, and each is easier to plan for along the way than at the point of sale.

You can still lift your value before June 2027

Most practices are valued on profitability. Future maintainable earnings multiplied by a capitalisation rate gives the enterprise value, and adding surplus cash and subtracting net structural debt gives the equity, or share, value. Rules of thumb are still widely used, with cents in the dollar for accounting firms and recurring revenue multiples for financial planning practices. 

The multiples we're seeing at the moment sit at 3.5 to 4.5 times profit for accounting firms, or up to $1.50 per dollar of fees. Financial planning practices are attracting 5.5 to 6.5 times profit, or up to 3.5 times recurring revenue.

Those multiples show why profit margin is often the most practical lever. For a financial planning practice valued at 5.5 to 6.5 times profit, an extra $100,000 of maintainable profit could add $550,000 to $650,000 in value. Your margin is usually easier to shift than your capitalisation rate, and under the new rules, every dollar of value built before 30 June 2027 is growth that keeps the 50% discount.

Beyond profit, buyers and valuers look closely at risk:

• Key person risk is one of the biggest detractors, particularly where clients deal with only one adviser and an administrator. Practices where clients work with more than one person, and where more than one team member is involved in each appointment, are more resilient and more valuable. 

  
  

• Strong systems add value too, including a CRM, a procedures manual and a current tech stack, while the absence of a central database, aged software and poor data all count against you. Technology, used well, lets your team do more, and AI can add to that when it's adopted with guardrails.

Your client base also shapes your value. A practice that is bringing on younger clients and still taking on new, ideal clients looks very different from one with an ageing client base that has closed its doors to new business because it's out of capacity. Higher average fees, multiple services and regular touchpoints through the year all add value, while low fees, once-a-year contact and weak relationships detract from it. Owners who are proactive and future-focused, with a succession plan in place, give a buyer far more confidence than a sole owner-adviser with no plans.

One of our clients asks the same question in every board meeting:

It's a simple filter, and a useful one for every decision between now and June.

Succession is part of the picture

If succession is on your horizon, the 2027 valuation is a natural place to start. Good succession comes down to the maths, the people and the timing, and it works best when owners start thinking about it earlier than feels necessary. How the transition is funded matters too: debt typically costs 7 to 8% pre-tax and is tax deductible, while equity funding can cost 16 to 25% and isn't.

Start the conversation now

A valuation at 30 June 2027 is one of the few parts of the new CGT rules you can control. The owners who will get the most from it are the ones who start now, while there is still time to improve their numbers and gather the evidence that supports them. 

We'd encourage you to get in touch sooner rather than later. Book a free discovery call with our team to talk through where your practice sits and what you can do between now and June.