Company valuation guide: methods to value your business
Learn how company valuation works and which methods can help you value your small business.
Written by Lena Hanna—Trusted CPA Guidance on Accounting and Tax. Read Lena's full bio
Published Monday 20 April 2026
Table of contents
Key takeaways
- Prepare your financial statements, asset inventory, and legal documents covering the last three to five years before starting any valuation, as thorough preparation makes your results more accurate and reliable.
- Apply at least two or three valuation methods together, such as book value, earnings multipliers, and revenue multipliers, to establish a realistic value range rather than relying on a single calculation.
- Research the standard multipliers for your specific industry, as these vary significantly between sectors and have a major impact on your final valuation figure.
- Use a DIY valuation for internal planning and goal-setting, but get a professional valuation for formal situations like selling your business, raising investment, or dealing with legal matters.
Key takeaways
• Prepare comprehensive financial documentation including profit and loss statements, balance sheets, and cash flow statements for the last three to five years before beginning any valuation process
• Apply multiple valuation methods such as book value, earnings multipliers, and revenue multipliers to establish a realistic value range rather than relying on a single calculation
• Recognise that DIY valuations using basic formulas work well for internal planning and goal-setting, while professional valuations are essential for formal purposes like selling your business or seeking investment
• Understand that industry-specific multipliers and market conditions significantly impact your company's value, making it important to research standard multipliers for your particular sector
What is a company valuation?
Company valuation is the process of calculating your business's monetary worth using established financial methods, such as the widely used valuation techniques of the market, cost, and income approaches. This estimated value helps you make informed decisions about:
- selling your business
- seeking investment from investors
- applying for business finance
- planning for growth or exit
A valuation provides an estimate, not a guaranteed sale price.
Prepare for your valuation
Preparing your business information before starting a valuation makes your results more accurate and reliable. Gather these key documents and details first:
- Financial statements: profit and loss statement, balance sheet, and cash flow statement for the last three to five years, keeping in mind your lodgement deadline will depend on your specific company type (typically three to four months after the financial year ends)
- Asset inventory: tangible assets (equipment, property, inventory) and intangible assets (patents, trademarks, customer lists)
- Legal documents: business registration, leases, and contracts with customers or suppliers
- Business plans: updated marketing strategies and growth forecasts
What affects business value
Your company's value depends on factors both inside and outside your control. Understanding these drivers helps you choose the right valuation method and set realistic expectations.
Industry factors
Your company's value depends on more than your own numbers. Industry context plays a significant role.
- Industry multipliers: Different industries have different standard multipliers. A tech company with recurring revenue typically has a higher multiplier than a retail business. An accountant, especially valuation specialists recognised by the ATO, can help you find the right range for your sector.
- Market trends: A business in a growing market is generally seen as more valuable than one in a declining sector.
- Competition: A business with a unique product or strong competitive advantage often commands a higher valuation.
Business-specific factors
Your individual business characteristics also affect value.
- Years of operation: Established businesses with proven track records typically command higher valuations.
- Owner dependency: A business that runs without the owner is worth more than one that relies heavily on them.
- Customer concentration: Diversified customer bases reduce risk and increase value.
- Tangible vs intangible assets: Physical assets are easier to value by considering their highest and best use, while brand reputation and customer relationships add worth but are harder to quantify.
- Circumstances of the sale: Urgent sales or distressed situations typically result in lower valuations.
Choose the right valuation method
The best valuation method depends on your industry, business type, and reason for the valuation. Here's how to match methods to your situation:
- Asset-based methods: Work best for businesses with significant tangible assets, such as manufacturing or real estate companies
- Earnings-based methods: Work best for established, profitable businesses like professional services or retail stores
- Market-based methods: Work best when you have good data on comparable sales in your industry
Most accountants recommend using two or three methods together for a more balanced valuation range.
How to value a company
The following eight methods show you how to calculate your company's value, from simple balance sheet calculations to more complex earnings-based approaches.
Book value calculation
Book value is your company's worth calculated by subtracting total liabilities from total assets on your balance sheet. It shows the net value of everything your business owns after debts are paid.
Book value formula
Book value = Assets - Liabilities
Assets include the following items:
- property, inventory, and equipment
- cash reserves and accounts receivable
- intellectual property like patents
Liabilities include the following items:
- loans and unpaid taxes
- accounts payable (bills you owe)
Example: A business with $10m in assets and $5m in debts has a book value of $5m.
Liquidation value calculation
Liquidation value calculates what you'd receive if you sold all assets and paid all debts at current market prices. This differs from book value because market conditions affect actual selling prices.
Accounting standards define the fair value of a financial liability as no less than the amount payable on demand.
Market value matters for several reasons:
- demand changes reduce asset values
- competition affects selling prices
- technology makes assets obsolete
- market disruption impacts actual sale proceeds
Liquidation valuation formula
Company value = Liquidation value of assets – Liabilities
Multiply company earnings
Earnings-based valuation multiplies your annual profits by an industry-standard multiplier to estimate company value. This method works well for profitable businesses with consistent earnings because it reflects your ability to generate ongoing returns.
Earning-based calculation formula
Company value = Earnings x Multiplier
Two components determine your valuation:
You can use different earnings options:
- net profit (after all expenses)
- EBITDA (before interest, taxes, depreciation, and amortisation)
Several multiplier factors affect your valuation, typically ranging from 2x to 10x or higher:
- loyal customer base increases your multiplier
- market exclusivity adds value
- protected intellectual property boosts worth
- industry norms set baseline multipliers
Multiply company revenue
Revenue-based valuation multiplies your annual sales by an industry multiplier to estimate company value. This method uses total revenue instead of profit, making it useful for:
- businesses with low margins
- companies reinvesting heavily in growth
- startups not yet profitable
Times revenue formula
Company value = Annual revenue x Multiplier
Industry-specific multipliers vary significantly. A local accountant or business broker can tell you the typical multiplier range for your type of business.
Multiply free cash flow
Free cash flow valuation multiplies the cash remaining after operating costs and planned investments by an industry multiplier. This method shows your business's true cash-generating ability and capacity to fund future growth.
Free cash flow formula
Company value = Free cash flow x Multiplier
This method works best for businesses planning:
- equipment upgrades
- shop refits
- digital improvements
FAQs on company valuation
Here are answers to common questions about valuing a company.
How often should I value my company?
You should review your company's value annually for internal planning purposes and whenever you're considering major decisions like raising capital, selling the business, or bringing in new partners.
What's the difference between market value and book value?
Book value shows your company's worth based on assets minus liabilities from your balance sheet. Market value reflects what buyers would actually pay based on current market conditions, growth potential, and industry trends.
Do I need a professional valuation?
Professional valuations are essential for formal purposes like selling your business, seeking significant investment, or legal matters. DIY valuations using basic formulas work well for internal planning and setting business goals.
How long does a company valuation take?
A DIY valuation using basic methods can take a few hours once you have your financial documents ready. A professional valuation typically takes two to four weeks, depending on your business complexity and the depth of analysis required.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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