How to value a business: 6 methods for your company

Published Tuesday 14 April 2026

Table of contents

• What is a business valuation?
• How to value a business: six methods
• Factors that affect business value
• Which valuation method should you use?
• FAQs on business valuation

Key takeaways

• Apply multiple valuation methods to get a complete picture of your business worth, matching the method to your business type and purpose—use earnings-based valuation for profitable service businesses, times-revenue for growing companies not yet profitable, and book value for asset-heavy businesses like manufacturing or real estate.
• Recognize that business valuation is an estimate rather than a guaranteed sale price, as the final value depends on market conditions, buyer demand, competition, and how potential buyers perceive your company's future potential.
• Focus on improving qualitative factors that increase business value beyond financial numbers, including building customer loyalty, developing intellectual property, creating recurring revenue streams, and establishing a strong management team that can operate without you.
• Get your business valued every two to three years to track growth and identify improvement opportunities, and always obtain a professional valuation before major decisions like selling, seeking investment, or transferring ownership to meet legal and financial requirements.

What is a business valuation?

Business valuation is the process of calculating your company's monetary worth. It determines your fair market value. The Canada Revenue Agency considers this the highest price obtainable in an open and unrestricted market.

It gives you a concrete number to work with when selling, raising capital, or planning for the future, which is often the greater of its liquidation value and its going concern value.

You might need a business valuation to:

• sell your business: set realistic asking prices and strengthen your negotiating position
• seek investment: demonstrate your company's worth to potential investors
• meet reporting requirements: satisfy accounting and legal obligations
• plan succession: transfer ownership to family members or employees, noting that 2021 legislation altered the tax treatment of many family transfers
• secure financing: provide lenders with collateral valuations

A valuation is an estimate, not a guaranteed sale price. The final selling price depends on demand, market conditions, competition, and buyer perception of your business's future potential.

How to value a business: six methods

You can value a business using six main methods. The right method depends on your business type and why you need the valuation.

1. Book valuation

Book valuation calculates what your business owns minus what it owes.

Formula: Value = assets – liabilities

This method treats your business as the sum of its parts. For certain tax purposes, specific assets like corporate owned life insurance are valued at their cash surrender value.

Assets include:

• physical assets: land, buildings, vehicles, equipment, inventory
• financial assets: cash, accounts receivable (money customers owe you)
• intellectual property: copyrights, trademarks, patents

Liabilities include:

• 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

Liquidation value estimates what you'd receive if you closed the business today, sold everything, and paid off all debts.

The key difference from book value: liquidation value uses current market prices rather than depreciated book values, as a quoted price in an active market provides the most reliable evidence of fair value according to International Financial Reporting Standards (IFRS). Market value reflects what a buyer would actually pay, while book value is a theoretical number based on purchase price minus depreciation.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier.

Formula: Value = earnings × multiplier

Multiplier ranges vary by business type:

• 2 to 3x multiplier: basic service businesses with high competition
• 4 to 6x multiplier: established businesses with steady customers
• 7x and higher multiplier: businesses with strong competitive advantages

Buyers pay higher multipliers for businesses with these characteristics:

• 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, commonly used for small businesses
• earnings before interest, taxes, depreciation, and amortization (EBITDA): typically higher than net profit and often preferred by buyers

Example: A business earning $350,000 annually with a 2x multiplier is worth $700,000. With a 5x multiplier, it's worth $1.75M.

4. Times-revenue valuation

Times-revenue valuation uses your annual sales instead of profit to calculate business worth. This method works well for growing businesses that haven't yet reached consistent profitability.

Formula: Value = revenue × multiplier

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow as its starting point. Free cash flow is the money left after covering operating expenses and necessary investments like equipment upgrades.

Formula: Value = free cash flow × multiplier

This method is less common for small businesses because of:

• complex calculations: detailed financial analysis beyond basic profit and loss, such as creating cash flow forecasts, which are considered unobservable Level 3 inputs under IFRS
• professional expertise: most small business owners need help from trained valuers
• extensive data requirements: comprehensive records of capital expenditures and cash flows

The Canada Revenue Agency may request financial statements for the five most recent fiscal periods during a valuation.

6. Entry-cost valuation

Entry-cost valuation estimates what it would cost to build an equivalent business from scratch. If you could replicate a business for $50,000, that sets a baseline for its value.

You'll need to adjust this baseline for:

• time required to reach current operational level
• effort to build customer relationships and goodwill
• risk and uncertainty of starting fresh

Use entry-cost valuation to sense-check other methods. If times-revenue gives you $300,000 but entry-cost suggests $100,000, you know further analysis is needed to find the true value.

Factors that affect business value

Business value depends on more than financial statements. Buyers and investors consider qualitative factors that formulas can't fully capture.

Factors that increase business value:

• brand reputation: strong recognition and customer trust
• customer loyalty: long-term relationships and repeat business
• intellectual property: patents, trademarks, proprietary processes
• management team: experienced leadership that can operate without the owner
• market position: growing industry with strong competitive advantages
• revenue quality: recurring or subscription-based income streams
• growth potential: clear opportunities for expansion

Which valuation method should you use?

Understanding these factors helps you select the right valuation approach.

Choose your valuation method based on your business type and purpose. Using multiple methods gives you a balanced view of your company's worth.

Match your method to your situation:

• asset-heavy businesses (manufacturing, real estate): use book value or liquidation value
• stable, profitable service businesses: use earnings-based valuation
• growing businesses not yet profitable: use times-revenue valuation
• businesses with significant equipment investments: consider discounted cash flow

Match your method to your purpose:

• selling your business: use earnings-based or times-revenue to set asking prices
• seeking investment: use DCF to demonstrate future potential
• estate planning or divorce settlements: use book value or liquidation value for asset division
• securing loans: use liquidation value to establish collateral

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

Here are answers to common questions about business valuation.

How much does a business valuation cost?

Professional business valuations typically cost between $2,000 and $10,000 for small businesses, depending on complexity. More detailed valuations for larger businesses can exceed $20,000. Some accounting firms offer preliminary valuations as part of their service packages.

How often should I get my business valued?

Get your business valued every two to three years to track growth and identify improvement opportunities. You should also get a valuation before major decisions like selling, seeking investment, or transferring ownership.

Can I value my own business?

You can calculate a preliminary valuation yourself using the methods described above. However, lenders, investors, and the Canada Revenue Agency typically require valuations from qualified professionals for official purposes.

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

Fair market value is what a willing buyer would pay a willing seller in an open market with full information. Market value can be influenced by specific circumstances, time pressures, or limited buyer pools. For tax purposes, the Canada Revenue Agency uses fair market value.

Does business valuation affect my taxes?

Business valuations can affect capital gains tax when selling your business, estate taxes during succession planning, and tax treatment of family transfers. Consult with a tax professional to understand the tax implications of your specific situation.