How to value a business

Published Wednesday 3 September 2025

Table of contents

• What is a business valuation?
• What information do you need to value a business?
• What factors affect business value?
• When should you get professional valuation advice?
• Understanding your business value for better decisions
• FAQs on business valuation

Key takeaways

• Apply multiple valuation methods including book value (assets minus liabilities), earnings-based valuation (annual profit times industry multiplier), and times-revenue approaches to get a comprehensive range of your business worth rather than relying on a single calculation.
• Gather essential financial documents including three to five years of profit and loss statements, balance sheets, cash flow statements, detailed asset lists, and legal documents before attempting any valuation to ensure accuracy and completeness.
• Recognise that factors beyond financial numbers significantly impact business value, including intangible assets like brand reputation and customer loyalty, years of operation, market conditions, and the circumstances surrounding your reason for selling.
• Seek professional valuation advice from qualified experts following standards like APES 225 when selling your business, seeking significant investment, settling legal disputes, or planning succession, as formal valuations add credibility to major transactions.

What is a business valuation?

Business valuation is the process of determining how much your business is worth, or its fair value, which is officially defined as the price that would be received to sell an asset in an orderly transaction. Understanding your business value helps you make informed decisions about your company's future.

You'll need a business valuation for:

• Selling your business: Setting a realistic asking price
• Getting finance: Providing security for loans or investment
• Financial reporting: Meeting legal and accounting requirements
• Succession planning: Transferring ownership to family or employees
• Partnership decisions: Dividing shareholdings fairly

Business valuation and selling price are not the same. Your valuation is a starting point, but the final selling price depends on market conditions.

Factors that influence your final selling price:

• Current market demand for businesses like yours
• Economic conditions in your industry
• Competition from other businesses for sale
• Intangible assets like brand reputation or customer loyalty
• Future growth prospects and market position

What information do you need to value a business?

Gather the right information before you value your business. This makes the process easier, whether you do it yourself or with a professional. You'll need:

• Financial statements: Profit and loss statements, balance sheets, and cash flow statements for the last three to five years.
• Asset list: A detailed list of all business assets, including property, equipment, and inventory, along with their current market value.
• Legal documents: This includes your business registration, permits, leases, and any contracts with customers or suppliers.
• Business plans: Your strategic plans show potential buyers the future direction and growth opportunities for the business.

What factors affect business value?

Valuing your business involves more than just the numbers. These factors can affect your business value:

• Assets: Both tangible (like equipment) and intangible (like brand reputation, customer lists, and intellectual property). Under Australian regulation, certain intangible assets must be tested for impairment each year.
• Years of operation: A business with a long, stable history is often seen as less risky and more valuable than a new startup.
• Market conditions: The overall health of the economy and your specific industry can impact how attractive your business is to buyers.
• Reason for selling: The circumstances of the sale can influence the final price. A planned exit is often viewed more favourably than a forced sale.

6 methods of business valuation

Here are the 6 key methods to help value your business.

1. Book valuation

Book value calculates your business value using your balance sheet. It's the simplest method and gives you a basic value based on your assets minus your liabilities.

Formula: Value = Assets – Liabilities

This means:

• Assets: Everything your business owns (cash, inventory, equipment, property)
• Liabilities: Everything your business owes (loans, unpaid bills, taxes)

Assets include things like land, buildings, inventory, vehicles, equipment, cash, and accounts receivable (money owed by customers). Intellectual property such as copyrights, trademarks and patents are also assets.

Liabilities include debts like loans, taxes owed, or accounts payable (unpaid bills).

In this model, you value your business as the sum of its parts. If your business owns $10 million in assets and owes $5 million in debts, the book value is $5 million.

2. Liquidation value

Liquidation value is similar to book value. It shows what you would have left if you closed your business, sold the assets, and paid all the debts. The difference is that liquidation value uses the market value of assets, not the book value. Market value is what someone would pay for the asset. Book value is the purchase price minus depreciation.

3. Earnings-based valuation

Earnings-based valuation works by multiplying your annual profit by an industry multiplier. This method shows how much income your business can generate.

Formula: Value = annual earnings × multiplier

Understanding multipliers:

• Range: Typically 2 to 10+ times annual earnings
• Example: $350,000 earnings × 2 multiplier = $700,000 value
• Higher multiplier example: $350,000 earnings × 5 multiplier = $1.75M value

What increases your multiplier:

• Loyal, long-term customers
• Unique market position or intellectual property
• Predictable revenue streams
• Strong competitive advantages

Bigger multipliers are typically given to businesses that have loyal, long-term customers, exclusivity in their local market, intellectual property or hard-to-replicate business models or market positions. Certain industries may have conventionally accepted multipliers.

The earnings number is also important. It could be the net profit or EBITDA. Earnings before interest, tax, depreciation and amortisation (EBITDA) is a bigger number than net profit because it includes all the money made before paying taxes, before paying interest on loans, and before accounting for the cost of depreciating assets

4. Times-revenue valuation

The times-revenue valuation is similar to the earnings-based valuation, but it uses revenue (or sales) instead of profit. The formula is: value = revenue × multiplier.

5. Discounted cash flow valuation

Instead of multiplying profit or revenue, you can multiply free cash flow. Free cash flow is the annual profit left after paying for maintenance or upgrades your business needs. The formula is: value = free cash flow × multiplier.

Calculating free cash flow is more complex than calculating revenue, earnings before interest, tax, depreciation and amortisation (EBITDA), or net profit. This method is less common for small businesses. A business valuer can help you decide which method gives the most accurate value for your business.

6. Entry-cost valuation

An entry-cost valuation asks what it would cost to start a business like the one being valued. If you could build an equivalent business for $50,000, then the existing business is probably worth $50,000 too.

You need to adjust for the time, effort, and investment needed to start from scratch and build goodwill with customers.

The entry-cost business valuation may sometimes be used to sense-check another form of valuation. You might try the times-revenue method and get a value of $300,000, then try the entry-cost valuation and get $100,000. You can then do further analysis to find the true value of your business.

When should you get professional valuation advice?

These methods give you a starting point, but sometimes you need an expert. A formal valuation from a qualified professional who follows standards like APES 225 Valuation Services adds credibility when you are:

• selling your business or negotiating a merger
• seeking significant investment or bank financing
• settling a legal dispute or shareholder buyout
• planning for succession or transferring ownership

Understanding your business value for better decisions

Three widely used valuation techniques give you different perspectives on your business value:

Asset-based approach:

• Book value and liquidation methods
• Best for: Asset-heavy businesses or worst-case scenarios

Income-based approach:

• Earnings, revenue, and cash flow methods
• Best for: Profitable businesses with predictable income

Market-based approach:

• Entry-cost and comparable business methods
• Best for: Businesses in competitive markets

Next steps: Choose two or three methods that best fit your business type and compare the results. The range will give you a realistic valuation bracket for decision-making.

Use your valuation results as tools for negotiation, not as final prices.

How to apply your valuation:

• Set realistic expectations for buyers, investors, or lenders
• Establish negotiation boundaries with minimum acceptable offers
• Identify value gaps that need addressing before sale
• Support financing applications with documented business worth

Your valuation gives you confidence in business discussions and helps you make informed decisions about your business's future. Ready to get a clearer picture of your finances? Try Xero accounting software for free.

FAQs on business valuation

Here are some common questions and answers most small business owners might have about valuing a business.

What's a good profit multiplier for a small business?

There is no single answer, as multipliers vary by industry, business size, and stability. For small businesses, the range is usually between two and five times annual profit. If your business has strong, recurring revenue and a unique market position, you may get a higher multiplier.

What's the difference between book value and market value?

Book value is based on your balance sheet (assets minus liabilities). Market value is what a buyer is willing to pay for your business. Market value is often higher because it includes intangible assets like brand reputation and future growth potential.

Can I value my business myself?

Yes, you can use the methods in this guide to estimate your business's value. This helps with your internal planning and goal setting. For formal transactions like a sale or a large loan, get an independent valuation from a professional.