How to value a business: Methods to find your business worth

Published Friday 7 November 2025

Table of contents

• What is a business valuation?
• What information do you need to value a business?
• What factors affect business value?
• 7 methods of business valuation
• 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 Accounting Professional and Ethical Standards (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 your business's fair market value, often following formal guidelines like the International Valuation Standards (IVS). It gives you the information you need to make major decisions about selling, financing, or growing your business.

Business valuation calculates what a buyer would pay for your business in a normal transaction. This figure becomes your starting point for negotiations, loan applications, and strategic planning.

You'll need a business valuation for:

• Selling your business: Set a realistic asking price and negotiate from a strong position

• Securing finance: Provide lenders and investors with credible business worth documentation
• Legal compliance: Meet financial reporting and tax requirements
• Succession planning: Transfer ownership fairly to family members or employees
• Partnership changes: Divide shareholdings accurately during buy-ins or buy-outs

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?

Proper preparation streamlines your valuation process and improves accuracy. Having the right documents ready saves time and ensures you don't miss critical factors that affect your business worth.

Essential documents you'll need:

• Financial statements: Profit and loss statements, balance sheets, and cash flow statements for three to five years
• Asset documentation: Detailed list of all business assets with current market values
• Legal paperwork: Business registration, permits, leases, and key contracts
• Strategic plans: Business plans showing growth opportunities and future direction

What factors affect business value?

Business value depends on both financial performance and qualitative factors. Understanding these variables helps you accurately assess what buyers will pay for your business.

Key factors that influence your business value:

• Tangible and intangible assets: Equipment, property, brand reputation, customer lists, and intellectual property
• Operating history: Established businesses with stable track records typically command higher values than startups
• Market conditions: Economic health and industry trends affect buyer interest and pricing
• Sale circumstances: Planned exits usually achieve better prices than forced sales

7 methods of business valuation

Here are 7 key methods to help value your business.

1. Book valuation

Book valuation gives you a baseline business value by calculating what you own minus what you owe. This method works best for asset-heavy businesses or as a starting point for other valuations.

Formula: Value = Assets – Liabilities

How it works:

• Assets: Everything your business owns (cash, inventory, equipment, property, intellectual property)
• Liabilities: Everything your business owes (loans, unpaid bills, taxes)
• Example: $10 million in assets minus $5 million in debts = $5 million book value

Assets include things like land, buildings, inventory, vehicles, equipment, cash, and accounts receivable. For tax purposes, rules often permit an immediate deduction for certain depreciating assets costing $300 or less. Intellectual property such as copyrights, trademarks and patents are also assets.

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

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 calculates business value by multiplying annual profit by an industry-specific multiplier. This method works well for profitable businesses with predictable income streams.

Formula: Value = Annual earnings × Industry multiplier

Multiplier ranges and examples:

• Typical range: 2 to 10+ times annual earnings
• Basic example: $350,000 earnings × 2 multiplier = $700,000 value
• Strong business example: $350,000 earnings × 5 multiplier = $1.75 million value

Factors that increase your multiplier:

• Customer loyalty: Long-term, recurring customers
• Market position: Unique competitive advantages or intellectual property
• Revenue predictability: Stable, recurring income streams
• Growth potential: Clear opportunities for expansion

You may get a higher multiplier if your business has loyal customers, a unique market position, or valuable intellectual property. Certain industries may have conventionally accepted multipliers.

The earnings figure can be net profit or earnings before interest, tax, depreciation and amortisation (earnings before interest, tax, depreciation and amortisation (EBITDA)). EBITDA is usually higher than net profit because it does not subtract taxes, interest, or depreciation.

4. Times-revenue valuation

Times-revenue valuation is similar to earnings-based valuation, but it uses revenue instead of profit.

• Formula: 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, as it must account for variables like systematic risk, which is included in the discount rate to determine present value. This method is less common for small businesses. You can ask a business valuer to help you choose the best method 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.

You can use the entry-cost valuation to check the results of another method. 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.

7. Market-based valuation

The market-based valuation looks at what similar businesses have sold for. It's like valuing a house by looking at recent sales in the same neighbourhood. If businesses like yours are selling for a certain price, it gives you a good idea of your own business's market value. This method works best when you have plenty of data on recent sales in your industry.

When should you get professional valuation advice?

Professional valuations provide independent, credible assessments that banks, investors, and legal systems accept. You need expert help when the stakes are high or when you require formal documentation.

When to get professional valuation advice:

• Selling your business: Formal valuations support asking prices and negotiations
• Seeking investment: Banks and investors require independent assessments for significant financing
• Legal disputes: Court proceedings and shareholder buyouts need qualified, defensible valuations, as these can involve complex, multi-billion-dollar litigation.
• Succession planning: Family transfers and employee buyouts benefit from neutral, professional assessments

Understanding your business value for better decisions

Three valuation approaches give you a comprehensive view of your business worth. Using multiple methods provides a realistic value range for decision-making.

Asset-based approach

• Methods: Book value and liquidation value
• Best for: Asset-heavy businesses, manufacturing, or conservative estimates
• Shows: What your business is worth if sold for parts

Income-based approach:

• Methods: Earnings, revenue, and cash flow multiples
• Best for: Profitable service businesses with predictable income
• Shows: What your business is worth based on earning potential

Market-based approach:

• Methods: Comparable sales and replacement cost
• Best for: Businesses in active markets with recent sales data
• Shows: What buyers actually pay for similar businesses

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 free for 30 days.

FAQs on business valuation

Find answers to common questions about valuing your business below.

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. You may get a higher multiplier if your business has strong, recurring revenue and a unique market position.

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

Book value is your assets minus liabilities. Market value is what a buyer will pay, often more because it includes intangible assets like brand reputation and 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.