Business valuation: methods to value your business

Published Monday 13 April 2026

Table of contents

• What is a business valuation?
• What information do you need to value a business?
• What factors affect business value?
• How to choose the right valuation method for your business
• Seven methods of business valuation
• When should you get professional valuation advice?
• Understanding your business value for better decisions
• FAQs on business valuation

Key takeaways

• Gather essential financial records, asset documentation, legal paperwork, and strategic plans before starting your valuation to save time and improve accuracy.
• Use multiple valuation methods rather than relying on a single approach to establish a realistic value range that accounts for different aspects of your business worth.
• Choose your primary valuation method based on your business type: asset-heavy businesses should start with book valuation, service businesses with steady profits should use earnings-based valuation, and high-growth businesses should consider discounted cash flow methods.
• Engage a professional valuer when selling your business, seeking significant investment, facing legal disputes, or planning succession to provide independent, credible assessments that banks, investors, and courts accept.

What is a business valuation?

Business valuation is how you calculate your business's fair market value, giving you a credible starting point for selling, securing finance, or planning growth. This figure represents what a buyer would pay in a normal transaction, often following formal guidelines like the International Valuation Standards (IVS), which have updated standards effective 31 January 2025.

A formal valuation supports major business decisions, including:

• Selling your business: set a realistic asking price and negotiate from a strong position
• Securing finance: provide lenders and investors with credible documentation
• Meeting legal requirements: satisfy financial reporting and tax obligations, as certain specialists are recognised by the ATO to prepare market valuations for tax purposes
• Planning succession: transfer ownership fairly to family members or employees
• Managing partnership changes: divide shareholdings accurately during buy-ins or buy-outs

Your valuation provides a starting point, but the final selling price often differs based on market conditions at the time of sale.

Factors that influence your final selling price include:

• market demand for businesses like yours
• economic conditions in your industry
• competition from other businesses for sale
• intangible assets such as brand reputation or customer loyalty
• future growth prospects and market position

What information do you need to value a business?

To value a business, you need financial records, asset details, legal documents, and strategic plans. Gathering these documents before you start saves time and improves accuracy.

Essential documents include:

• Financial statements: profit and loss statements, balance sheets, and cash flow statements for three–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 assets, operating history, market conditions, and sale circumstances. Understanding these factors helps you assess what buyers will pay.

Key factors that influence your business value include:

• 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

How to choose the right valuation method for your business

The right valuation method depends on your business type, purpose for valuing, and available financial data. Most businesses benefit from using two or three methods to establish a realistic value range, often drawing from three widely used valuation techniques: the market approach, the cost approach, and the income approach.

Choose your primary method based on these factors:

• Asset-heavy businesses (manufacturing, property, retail with inventory): start with book valuation or liquidation value
• Service businesses with steady profits: start with earnings-based valuation using profit multipliers
• High-growth businesses: consider discounted cash flow or times-revenue valuation
• Businesses preparing to sell: use market-based valuation to benchmark against recent comparable sales

Your valuation purpose also matters:

• Internal planning: a single method may be sufficient for rough estimates
• Selling or seeking investment: use multiple methods to support your asking price
• Legal disputes or succession: engage a professional valuer for formal documentation

If you have limited financial history, entry-cost valuation can provide a useful starting point by calculating what it would cost to build an equivalent business from scratch.

Seven methods of business valuation

Here are seven key methods to help value your business.

1. Book valuation

Book valuation calculates your business worth by subtracting what you owe from what you own. 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, including cash, inventory, equipment, property, and intellectual property
• Liabilities: everything your business owes, including loans, unpaid bills, and taxes
• Example: $10 million in assets minus $5 million in debts equals $5 million book value

Assets include land, buildings, inventory, vehicles, equipment, cash, accounts receivable, and intellectual property such as copyrights, trademarks, and patents. For tax purposes, rules often let you immediately deduct certain depreciating assets costing $300 or less.

Liabilities include debts such as loans, taxes owed, and accounts payable (unpaid bills).

2. Liquidation value

Liquidation value shows what you would have left if you closed your business, sold all assets, and paid all debts. Unlike book value, liquidation value uses current market prices rather than accounting values.

The key difference: book value uses the original purchase price minus depreciation, while market value reflects what someone would actually pay for the asset today. Liquidation value is often lower than book value because assets sold quickly may fetch below-market prices.

3. Earnings-based valuation

Earnings-based valuation calculates business worth by multiplying annual profit by an industry-specific multiplier. This method works well for profitable businesses with predictable income.

Formula: Value = Annual earnings × Industry multiplier

Multiplier ranges and examples:

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

Factors that increase your multiplier include:

• customer loyalty: having long-term, recurring customers
• market position: holding unique competitive advantages or intellectual property
• revenue predictability: generating stable, recurring income streams
• growth potential: demonstrating clear opportunities for expansion

The earnings figure can be net profit or earnings before interest, tax, depreciation, and amortisation (EBITDA). EBITDA produces a higher valuation because it excludes taxes, interest, and depreciation from the calculation. Your industry may have conventionally accepted multipliers that buyers and sellers commonly use.

4. Times-revenue valuation

Times-revenue valuation calculates business worth by multiplying annual revenue by an industry multiplier. This method is useful for businesses that aren't yet profitable or have inconsistent earnings.

Formula: Value = Revenue × Multiplier

Revenue multipliers are typically lower than earnings multipliers because revenue doesn't account for costs. This method provides a quick estimate but may overvalue businesses with thin profit margins.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation estimates business worth based on projected future cash flows, adjusted to present value. This method accounts for the time value of money and business risk.

Formula: Value = Free cash flow × Multiplier (adjusted for discount rate)

Free cash flow is the profit remaining after paying to maintain equipment and make necessary upgrades. Calculating it requires accounting for variables like systematic risk; official guidance specifies that you adjust for that risk by including it in the discount rate.

This method is less common for small businesses due to its complexity. A professional valuer can help determine if DCF is appropriate for your situation.

6. Entry-cost valuation

Entry-cost valuation estimates business worth by calculating what it would cost to build an equivalent business from scratch. If you could replicate the business for $50,000, the existing business is likely worth at least that amount.

This method requires adjusting for the time, effort, and money you'd need to invest to start from scratch and build customer goodwill. Entry-cost valuation works well as a validation check. If your times-revenue method produces $300,000 but entry-cost produces $100,000, further analysis can help identify the true value.

7. Market-based valuation

Market-based valuation estimates business worth by comparing recent sales of similar businesses in your industry. This approach works like valuing a house by looking at sales in the same neighbourhood.

If businesses like yours are selling for a certain price, that gives you a realistic benchmark for your own market value. This method works best when you have access to recent sales data from business brokers, industry associations, or public records.

When should you get professional valuation advice?

Get professional advice on valuing your business when selling, seeking significant investment, facing legal disputes, or planning succession. Professional valuers provide independent, credible ways to assess your business that banks, investors, and courts accept, as specialists must undertake continuous learning to remain current with evolving standards and methodologies.

Situations requiring professional help include:

• selling your business: support your asking price and strengthen your ability to negotiate
• seeking investment: satisfy bank and investor requirements for an independent way to assess your business
• resolving legal disputes: provide qualified, defensible valuations for court proceedings and shareholder buyouts, which can involve complex litigation and require you to adhere to strict ethical and technical guidelines
• planning succession: ensure a neutral way to assess family transfers and employee buyouts

Understanding your business value for better decisions

Using multiple approaches to value your business provides a realistic value range rather than a single number. Each approach reveals different aspects of your business worth.

Consider these three approaches when valuing your business:

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

Apply your valuation to:

• set realistic expectations for buyers, investors, or lenders
• establish boundaries when you negotiate, with minimum acceptable offers
• identify value gaps that need addressing before you sell
• support your case when you apply for financing with documented business worth

Your valuation gives you confidence when you discuss business matters and helps you make informed decisions about your business's future.

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? Get one month free and see how Xero makes it easy to monitor your business finances.

FAQs on business valuation

Find answers to common questions about valuing your business below.

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

Small business profit multipliers typically range from two–five times annual profit. The exact multiplier varies by industry, business size, and stability. Businesses with strong recurring revenue and a unique market position often achieve higher multipliers.

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

Book value is your assets minus liabilities, based on accounting records. Market value is what a buyer will actually pay, which is often higher because it includes intangible assets like brand reputation, customer relationships, and growth potential. When selling, market value is typically the more relevant figure.

Can I value my business myself?

Yes, you can value your business yourself using the methods in this guide to plan internally and set goals. For formal transactions such as selling your business, securing a large loan, or resolving legal disputes, get a qualified professional to independently value your business.