Company valuation: Methods to value your business

Published Saturday 31 January 2026

Table of contents

• What is a company valuation?
• How to value a company
• Factors that affect your company's value
• When to get professional help with valuations
• Valuing a company takes expertise
• Get expert help with your business valuation
• FAQs on company valuation

Key takeaways

• Choose the right valuation method based on your business type and situation, using book value for asset-heavy companies, earnings multiples for profitable businesses, and revenue multiples for growing companies with minimal profits.
• Recognize that multiple factors significantly impact your company's value, including consistent profitability, customer diversity, recurring revenue streams, and competitive advantages like patents or exclusive market positions.
• Get professional valuation help when selling your business, seeking investment, or handling legal requirements, as expert analysis provides the credibility and accuracy that buyers and investors expect.
• Understand that calculated valuations serve as negotiation starting points rather than guaranteed sale prices, since buyers ultimately decide what they're willing to pay based on their own assessment of value.

What is a company valuation?

Company valuation is the process of determining your business's monetary worth. This estimated value helps you make informed decisions about selling, seeking investment, or financial planning.

While it doesn't guarantee a sale price, the valuation serves as a foundation for negotiations and financial reporting, and under specific legal conditions like a formal buy-sell agreement, can even be considered determinative of value.

How to value a company

Follow these eight steps to accurate company valuation:

1. Book value calculation

Book value calculation determines what your company is worth based on its balance sheet. This method calculates the net value of everything your company owns after subtracting debts.

A company's book value uses the assets and liabilities listed on its balance sheet.

Book value formula

Book value = Assets - Liabilities

In other words, it's the net value of everything the company owns after debts are subtracted.

Assets include:

• Property and equipment
• Inventory and cash reserves
• Accounts receivable
• Intellectual property like patents and, in some cases, the cash surrender value of corporate-owned life insurance

Liabilities include:

• Loans and unpaid taxes
• Accounts payable (bills you owe)

For example, a business with $10 million in assets and $5 million in debts has a book value of $5 million.

2. Liquidation value calculation

Liquidation value calculation determines what you'd receive if you sold all assets and paid off debts today. This method uses current market prices rather than recorded book values.

The distinction from book value matters because asset values fluctuate based on:

• Market demand: Temporary changes affect selling prices
• Competition: Increased competition reduces asset values
• Technology: Obsolete equipment loses value quickly
• Market disruption: Industry changes impact asset worth

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

3. Multiply company earnings

Earnings-based valuation multiplies your annual profits by an industry-specific number to estimate company worth. This method works well for profitable businesses with consistent earnings.

Earnings-based calculation formula

Company value = Earnings x Multiplier

The calculation uses two key components:

• Earnings figure: Either net profit or EBITDA (earnings before interest, taxes, depreciation, and amortization)
• Multiplier: Typically ranges from 2x to 10x+

Higher multipliers apply to businesses with:

• Loyal customer bases
• Market exclusivity
• Protected intellectual property
• Hard-to-replicate competitive advantages

4. Multiply company revenue

Revenue-based valuation multiplies your annual sales by an industry multiplier to estimate company worth. This method works well for growing businesses or those with minimal profits.

Times-revenue formula

Company value = Annual revenue x Multiplier

The calculation applies a multiplier to total revenue rather than profit. Industry-specific multipliers vary significantly between business types.

A local accountant or business broker can provide the standard multiplier range for your industry.

5. Multiply free cash flow

Free cash flow valuation uses the money remaining after covering operating costs and planned capital investments. This method shows whether your business generates enough cash to fund growth and improvements.

Free cash flow formula

Company value = Free cash flow x Multiplier

This approach works well for businesses needing upgrades like new equipment, renovations, or technology improvements. It demonstrates the company's ability to self-fund expansion beyond regular operations.

Calculating free cash flow requires detailed analysis of necessary capital expenditures.

6. Entry-cost analysis

Entry-cost analysis values your company based on what it would cost to recreate it from scratch. This method estimates startup expenses including equipment, customer acquisition, and brand building.

This approach works best for asset-heavy businesses where value comes primarily from physical resources. For example, valuing a printing company by calculating the cost of buying equivalent printing equipment.

The method doesn't work well for businesses with hard-to-replicate advantages like:

• Key customer relationships
• Proprietary information or patents
• Established brand goodwill
• Exclusive market positions

7. Market capitalization

For publicly traded companies, market capitalization reflects the total combined value of all shares. However, value is also tied to control; for example, the Canada Revenue Agency notes that a group of shareholders can control a corporation if they collectively own over 50% of voting shares and act in concert.

Share price formula

Company value = Share price x Number of shares

8. Enterprise value

This method also applies to publicly traded companies. It takes the combined value of all the company's shares but makes adjustments for debt and for cash held in reserves.

Enterprise value formula

Company value = Market capitalization + Debt – Cash

This provides a more comprehensive valuation snapshot than the market cap alone for publicly traded companies. This is often used in conjunction with the Debt-to-Equity (D/E) ratio, which is used to understand how much of the company's operations are being financed with debt rather than cash flow.

Factors that affect your company's value

Several key factors influence how much your business is worth. Understanding these elements helps you identify opportunities to increase your company's valuation.

Financial performance factors:

• Consistent profitability: Steady earnings over multiple years
• Revenue growth: Increasing sales trends year-over-year
• Cash flow stability: Predictable money coming in and going out
• Low debt levels: Minimal outstanding loans or obligations

Operational factors:

• Customer diversity: Not relying on just a few major clients
• Recurring revenue: Subscription or contract-based income streams
• Skilled team: Experienced employees and strong management
• Efficient systems: Streamlined processes and good technology

Market position factors:

• Competitive advantages: Unique products, patents, or market position
• Brand strength: Recognition and reputation in your industry
• Growth potential: Opportunities for expansion or new markets
• Industry trends: Whether your sector is growing or declining

When to get professional help with valuations

Professional valuation services provide accuracy and credibility that's essential for major business decisions. While you can estimate basic values yourself, certain situations require expert analysis.

Get professional help when:

• Selling your business: Buyers expect credible, third-party valuations
• Seeking investment: Investors require professional valuation reports
• Legal requirements: Divorce, estate planning, or tax purposes
• Complex businesses: Multiple revenue streams or unusual assets
• High-stakes decisions: When accuracy is critical for major choices

DIY valuation works for:

• Initial estimates: Getting a rough idea of your business worth
• Regular monitoring: Tracking value changes over time
• Internal planning: Making general business decisions
• Simple businesses: Straightforward operations with standard assets

Professional valuators use advanced methods, industry databases, and market analysis that aren't available to business owners. The cost of professional valuation typically ranges from $3,000 to $15,000 depending on business complexity.

Valuing a company takes expertise

Company valuation involves multiple methods and choosing the right approach requires expertise. While you can calculate basic book value from your balance sheet using accounting software, professional guidance ensures accuracy for other methods.

Calculated valuations may differ from actual sale prices. Valuation can be subjective, especially during negotiations. Buyers ultimately decide what they're willing to pay.

However, knowing your estimated value provides a strong foundation for negotiations and business decisions. Quality accounting software like Xero lets you generate balance sheets and financial reports on demand to support your valuation efforts.

Get expert help with your business valuation

Understanding your company's value gives you confidence in major business decisions. Whether you're planning to sell, seeking investment, or simply want to track your progress, knowing your worth helps you negotiate from a position of strength.

While basic calculations provide useful estimates, professional guidance ensures accuracy when it matters most. The right valuation method depends on your business type, industry, and specific circumstances.

Quality accounting software makes the process easier by providing accurate financial data for any valuation method. With real-time reporting and automated calculations, you can track the factors that influence your business value and make informed decisions about your company's future.

Ready to get a clearer picture of your business finances? Start a free trial and see how proper financial tracking supports better business valuations.

FAQs on company valuation

These answers cover common questions small business owners have about company valuation.

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

It depends on the industry and profitability. A business's value is often calculated by multiplying its revenue or profit by an industry-specific 'multiple'. For a business with $1 million in sales, a multiple of 2x would suggest a $2 million valuation, but this can vary widely based on factors like profit margins and growth potential.

Which valuation method is most accurate?

There's no single 'most accurate' method. The best approach depends on your business type and the reason for the valuation. Asset-based methods work well for manufacturing companies, while earnings-based methods are better for service businesses. Often, professionals use a combination of methods to get a comprehensive view.

Do I need a professional valuation or can I do it myself?

For internal planning or curiosity, a DIY calculation can be a good starting point. However, for official purposes like selling your business, securing a loan, or legal matters, a formal valuation from a qualified professional is essential for credibility and accuracy.

How much does a professional business valuation cost?

The cost varies depending on the complexity of your business and the level of detail required. A simple valuation may cost a few thousand dollars, while a more comprehensive one for a larger, more complex business will be more. It's best to get quotes from a few different advisors.

What makes a business worth more in a valuation?

Key factors that increase a company's value include consistent profitability, strong and predictable cash flow, a loyal customer base with recurring revenue, a strong brand, and efficient operations. Businesses that are not heavily reliant on the owner also tend to be valued higher.