Business valuation: How to value your company and why it matters

Published Tuesday 17 March 2026

Table of contents

• What is a business valuation?
• How to value a business: six methods
• Which valuation method should you use?
• Factors that affect business value
• When to hire a professional valuator
• Valuing a business is not a complete science
• Make informed business decisions with clear financial insights
• FAQs on business valuation

Key takeaways

• Choose your valuation method based on your business type and purpose—use asset-based methods like book value for businesses with significant tangible assets, earnings-based methods for stable profitable companies, and times-revenue for growing businesses still building toward profitability.
• Apply multiple valuation methods to get a balanced view of your business worth, as each approach captures different aspects of value and using several methods helps you arrive at a more accurate estimate.
• Recognize that factors beyond financial calculations significantly impact business value, including customer loyalty, competitive advantages, brand reputation, market conditions, and growth potential.
• Hire a professional chartered business valuator for high-stakes situations like selling your business, legal disputes, tax matters, or when you need a credible report that meets regulatory standards.

What is a business valuation?

A business valuation is the process of determining how much your company is worth in monetary terms. When you understand your business value, you can make informed decisions about your company's future.

Common reasons you might need a business valuation:

• Selling your business: Set realistic asking prices for negotiations
• Seeking investment: Show potential investors your company's worth
• Financial reporting: Meet accounting and legal requirements
• Succession planning: Plan ownership transfers to family or employees. Note: The tax treatment of family transfers changed in 2021.
• Securing loans: Provide lenders with collateral valuations

A business valuation provides an estimate of worth, separate from the final selling price. It may play a role in negotiations, but the ultimate selling price depends on many factors including demand, market conditions, competition, intangible assets, and future prospects.

How to value a business: six methods

There are six main methods you can use to value your business. Each method takes a different approach to calculating worth.

1. Book valuation

Book valuation calculates your business worth using the simple formula: value = assets – liabilities. For certain tax purposes, specific assets like corporate owned life insurance are valued at their cash surrender value. This method treats your business as the sum of everything it owns minus everything it owes.

Assets include the following:

• Physical assets: Land, buildings, vehicles, equipment, inventory
• Financial assets: Cash, accounts receivable (money customers owe you)
• Intellectual property: Copyrights, trademarks, patents

Liabilities include the following:

• Debts: Business loans, credit lines
• Obligations: Taxes owed, accounts payable (unpaid bills)

Example calculation: A business with $10M in assets and $5M in debts has a book value of $5M.

2. Liquidation value

The liquidation value is similar to the book value. It calculates what the owner would be left with if they closed the business, sold the assets and paid all the debts.

The subtle difference is that liquidation value uses market value rather than book value of assets. Market value reflects what someone would pay for the asset. The book value is the purchase price minus depreciation, so it's more of a theoretical number.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier. The formula is: value = earnings × multiplier.

Multiplier ranges vary by business type:

• Low (2–3x): Basic service businesses, high competition
• Medium (4–6x): Established businesses with steady customers
• High (7x+): Businesses with strong competitive advantages

Several factors can increase your multiplier:

• Customer loyalty: Long-term, repeat customers
• Market position: Local exclusivity or dominant market share
• Intellectual property: Patents, trademarks, proprietary processes
• Business model: Hard-to-replicate operations or systems

You can use different earnings figures:

• Net profit: Bottom-line earnings after all expenses
• EBITDA: Earnings before interest, taxes, depreciation, and amortization (typically higher than net profit)

Example: A business earning $350,000 annually with a 2x multiplier = $700,000 value. With a 5x multiplier = $1.75M value.

4. Times-revenue valuation

The times-revenue valuation is similar to the earnings-based valuation. Instead of using profit as the starting figure, it uses revenue (or sales). It follows the formula: value = revenue x multiplier.

5. Discounted cash flow valuation

Discounted cash flow valuation uses free cash flow instead of profit or revenue. Free cash flow is the money left over after covering all operating expenses and necessary business investments like equipment upgrades or maintenance.

Formula: value = free cash flow × multiplier

This method is less common for small businesses for several reasons:

• Complex calculations: Requires detailed financial analysis beyond basic profit and loss
• Professional expertise needed: Most small business owners need help from trained valuers
• Data requirements: Needs comprehensive records of capital expenditures and cash flows; for instance, the Canada Revenue Agency may request financial statements for the five most recent fiscal periods during a valuation.

When to use this method: Best for businesses with significant equipment, property, or technology investments where maintenance costs vary each year.

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.

Of course, you'll need to adjust for the hassle of starting from scratch, the time involved in getting it up to speed, and the investment needed to build goodwill with customers.

The entry-cost business valuation may sometimes be used to sense-check another form of valuation. If you're wondering how to value a business, you might first try the times-revenue method and get a value of $300,000, before trying the entry-cost valuation and getting just $100,000. You'll know you need to do some further analysis to land on the true value of the business.

Which valuation method should you use?

The right valuation method depends on your business type, your goals, and the data you have available. Each method has strengths, and it's often wise to use a combination to get a balanced view.

Asset-based methods like book or liquidation value are often used for businesses with significant tangible assets, such as manufacturing or real estate companies. They can also be a baseline for businesses still building toward profitability.

Earnings-based methods are popular for stable, profitable service businesses. They focus on the business's ability to generate profit for its owners. The times-revenue method can be useful for growing companies with strong sales that are still building toward profitability.

Consider the purpose of the valuation. If you're planning to sell, a buyer will likely focus on earnings and cash flow. If you're closing the business, the liquidation value is most relevant.

Factors that affect business value

A business valuation goes beyond the numbers on a balance sheet. Several other factors can increase or decrease what your business is worth in the eyes of a buyer or investor.

Intangible assets like brand reputation, customer loyalty, and intellectual property can add significant value. A strong management team, efficient business processes, and a diverse customer base also make a business more attractive.

Market conditions play a big role too. A business in a growing industry will likely command a higher valuation than one in a declining market. Your competitive position, recurring revenue streams, and potential for growth all contribute to the final number.

When to hire a professional valuator

You can estimate your business's value yourself. However, hiring a professional is sometimes the best move. A chartered business valuator (CBV) can provide an objective valuation that holds up to scrutiny, which is crucial in certain situations.

Consider hiring a professional for major events: when you sell your business, negotiate a merger, or secure significant financing. Legal and tax situations often require professional valuations, such as shareholder disputes, divorce settlements, or estate planning.

A professional can navigate the complexities of different valuation methods and provide a credible report that stands up to scrutiny. Reports following Chartered Business Valuation Institute standards are designed to meet the CRA's expectations.

Valuing a business is not a complete science

Business valuations provide estimates that inform, rather than determine, selling prices. Multiple factors beyond calculations affect what buyers will actually pay, including market conditions, competition, and timing.

There are three main valuation approaches:

Asset-based methods include:

• Book value: Sum of assets minus liabilities
• Liquidation value: What you'd get if you sold everything today

Income-based methods include:

• Earnings-based: Annual profits × industry multiplier
• Times-revenue: Annual sales × industry multiplier
• Discounted cash flow: Free cash flow × multiplier

The cost-based method includes:

• Entry-cost: What it would cost to build your business from scratch

Get your financial data

Your balance sheet shows your book value and is essential for most valuation methods. If you use cloud accounting software like Xero, you can generate balance sheets instantly rather than waiting for year-end reports from your accountant.

Use valuations effectively

These calculations help you set realistic expectations and strengthen your position when you negotiate with buyers, investors, or lenders seeking collateral security. Get more tips in the guide to succession planning.

Make informed business decisions with clear financial insights

When you understand your business's value, you can make smart strategic decisions, whether you're planning for growth, considering an exit, or simply want to know where you stand. It helps you see the financial health of your business and identify opportunities for improvement.

Keep your financial records organized and up-to-date to make any valuation process smoother. With clear insights into your finances, you can focus on building a more valuable business.

See how simple it is to manage your books and get a real-time view of your performance. Get one month of Xero free.

FAQs on business valuation

Small business owners often ask these questions about business valuation.

How do you calculate what a business is worth?

Several formulas exist depending on your situation. A simple approach is the times-revenue method, where you multiply your annual revenue by an industry-specific multiplier. For example, a business with $500,000 in revenue and a multiplier of three would be valued at $1.5 million. More detailed methods look at assets, profits, or cash flow.

Is a business worth three times profit?

A multiple of three times profit is a common rule of thumb, though the right multiplier varies by situation. Multipliers range widely, with some businesses valued at two times profit and others at five times profit or more.

How much is a business worth with $1 million in sales?

The value of a business with $1 million in sales can vary widely. Depending on its profitability, assets, and industry, it could be worth anywhere from $500,000 to several million dollars. Sales are just one part of the valuation picture; profit and cash flow are often more important.

What's the difference between business valuation and market value?

A business valuation calculates an estimate of a company's economic worth, based on specific methods and data. Market value is the price a business would actually sell for in a competitive market, based on what a buyer is willing to pay. The valuation informs how you negotiate, but the market ultimately sets the price.