Business valuation guide: How much is your business worth?

Published Sunday 12 October 2025

Table of contents

• What is a business valuation?
• 6 methods to value a business
• Factors affect your business value
• Professional valuation vs DIY: when to get help
• Valuing a business is not a complete science
• FAQs on business valuation

Key takeaways

• Apply multiple valuation methods such as book value, earnings-based, and discounted cash flow to get a comprehensive picture of your business worth rather than relying on a single approach.

• Recognize that factors beyond financials significantly impact value, including management strength, customer diversity, operational systems, and your business's dependence on you as the owner.

• Utilize professional valuations when selling your business, meeting legal requirements, or handling transactions over $500,000, as certified appraisals provide credibility and accuracy that DIY methods cannot match.

• Maintain clean, organized financial records including balance sheets, profit and loss statements, and cash flow reports, as your valuation accuracy depends entirely on the quality of your underlying financial data.

What is a business valuation?

Business valuation is the process of determining your company's monetary worth using proven financial methods. This estimated value helps you make informed decisions about selling your business, securing loans, bringing in partners, or planning for the future.

Common reasons you might need a business valuation include:

• selling your business to get a realistic starting point for negotiations
• securing financing to show lenders your business's worth as collateral
• bringing in partners to determine fair equity splits
• planning for succession to transfer ownership to family or employees

meeting accounting and tax requirements for financial reporting, which often involves rigorous documentation. For example, IRS guidelines require professional appraisers to maintain a detailed case activity record for business valuations used in tax reporting.

6 methods to value a business

Here are 6 methods you can follow when valuing your business.

1. Book valuation

Book valuation calculates your business's worth using this simple formula: Assets - liabilities = business value. This method adds up what your business owns and subtracts what it owes.

What counts as:

• Physical assets: Land, buildings, equipment, inventory, vehicles
• Financial assets: Cash, accounts receivable, investments
• Intellectual property: Patents, trademarks, copyrights

What counts as:

• Debts: Business loans, credit lines, mortgages
• Obligations: Accounts payable, taxes owed, accrued expenses

A business with $500,000 in assets and $200,000 in liabilities has a book value of $300,000.

When to use: Best for asset-heavy businesses like manufacturing or real estate, less accurate for service businesses with few physical assets.

2. Liquidation value

Liquidation value is similar to book value. It shows what you would have left if you closed your business, sold the assets and paid all debts. The difference is that liquidation value uses the market value of assets, not the book value.

Market value is what someone would pay for the asset now. Book value is the original purchase price minus depreciation.

3. Earnings-based valuation

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

Formula: Business value = annual earnings × multiplier

A multiplier is the number buyers use to value a business based on its earnings. Think of it as the “price tag factor” that turns annual profit into a total business value.

Multipliers can vary:

• low multipliers (2–3 times) for service businesses or owner-dependent operations
• medium multipliers (4–6 times) for established businesses with recurring revenue
• high multipliers (7 times or more) for businesses with strong competitive advantages

What increases your multiplier:

• Customer loyalty: Long-term contracts, low churn rates
• Market position: Local monopoly, unique competitive advantages
• Growth potential: Expanding market, scalable business model
• Recurring revenue: Subscription models, maintenance contracts

Earnings options:

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

Example: A consulting firm earning $200,000 annually with a 3x multiplier = $600,000 business value.

4. Times-revenue valuation

Times-revenue valuation is similar to earnings-based valuation, but it uses revenue instead of profit. The formula is: value equals revenue times multiplier.

5. Discounted cash flow valuation

Discounted cash flow valuation uses your business's free cash flow, the cash available after covering all necessary expenses and investments. This method estimates your business value by projecting future free cash flows and discounting them to present value.

Free cash flow is the money left over after paying operating expenses, taxes, and required investments to maintain or grow your business.

Simple calculation:

1. Start with net profit
2. Add back non-cash expenses (like depreciation)
3. Subtract required capital investments (equipment, inventory)
4. Result = Free cash flow

When to use this method:

• Capital-intensive businesses: Manufacturing, construction, retail
• Growing businesses: Companies investing heavily in expansion
• Mature businesses: Stable operations with predictable cash flow

This method is more complex because you need to analyze cash flow in detail and make future projections. Small businesses often need professional help to use this method.

6. Entry-cost valuation

Entry-cost valuation looks at how much it would cost to start a similar business from scratch. If you could build the same business for $50,000, the existing business is likely worth about $50,000.

You should adjust for the time, effort and investment needed to start from scratch and build goodwill with customers.

You can use entry-cost valuation to check another valuation method. For example, if the times-revenue method gives a value of $300,000 but entry-cost valuation gives $100,000, you may need to do more analysis to find the true value.

Factors that affect your business value

Many factors beyond financial performance affect your business value. Understanding these factors helps you find ways to increase your business value before selling or seeking investment.

Financial performance factors

Financial results are usually the foundation of a valuation. Buyers and investors look closely at:

• Growing revenue consistently each year – demonstrates long-term demand and business stability.
• Maintaining high profit margins – signals operational efficiency and strong pricing power.
• Stable cash flow month to month – reduces risk for investors and shows predictable performance.
• Diverse customer base – avoids overreliance on one client and lowers revenue risk.

Operational strength indicators

Strong operations can boost your multiplier and overall valuation:

• Management team – a capable leadership team adds resilience and reduces owner dependency.
• Systems and processes – documented, repeatable workflows increase scalability and efficiency.
• Employee retention – low turnover shows healthy culture and reduces hiring costs.
• Market position – brand recognition, reputation, and unique advantages drive higher value.

Industry and market conditions

The broader environment also affects how much your business is worth:

• Growth trends – industries with strong demand or emerging markets attract higher valuations.
• Competition level – low barriers to entry can lower value; strong barriers make a business more defensible.
• Regulatory environment – compliance adds credibility, while heavy regulation may add risk.
• Economic factors – interest rates, inflation, and consumer confidence all impact investor appetite.

Risk factors that decrease value

Certain red flags can push your valuation down:

• Owner dependency – if the business can’t run without you, buyers see more risk.
• Customer concentration – overreliance on one or two large clients weakens negotiating power.
• Outdated systems – old technology or manual processes can hurt efficiency and growth potential.
• Legal issues – pending lawsuits or compliance gaps can scare off investors.

Professional valuation vs DIY: when to get help

Doing your own valuation works for initial estimates and planning, but professional valuations provide accuracy and credibility when the stakes are high.

When DIY valuation works

A do-it-yourself business valuation can be a good starting point when you only need an informal estimate of your company’s value. This approach is most effective when your business is relatively straightforward and your goal isn’t tied to a major transaction. For example, DIY methods are useful if:

• you want a ballpark estimate to guide strategic or succession planning
• you’re tracking changes in business value over time as part of financial goal-setting
• your business has simple financials with limited assets or revenue streams
• you’re preparing for informal discussions with partners or family members about ownership or long-term plans

DIY valuation can give you quick insights, but it’s rarely precise enough for buyers, lenders, or the IRS.

When to hire a professional

A professional business valuation is essential whenever accuracy, compliance, or negotiation leverage is required. Situations where you should engage a valuation expert include:

• selling your business, where buyers will expect third-party validation of fair market value
• meeting legal or tax requirements for divorce proceedings, estate planning, or IRS-related disputes
• negotiating with investors or lenders, who often require certified valuations before committing funds
• analyzing complex businesses with multiple revenue streams, intellectual property, or unique ownership structures
• any transaction exceeding $500,000, where risk is higher and precision matters

Professional valuers not only meet compliance standards but also protect you from undervaluing or overvaluing your company in critical negotiations.

What professionals provide

Unlike DIY methods, a certified professional delivers more than just numbers. A formal valuation typically includes:

• Certified accuracy that holds up for legal, tax, and financial reporting purposes, meeting IRS and regulatory guidelines
• Market expertise that benchmarks your business against industry peers and accounts for sector-specific risks
• Comprehensive analysis using multiple valuation methods, such as income, market, and asset-based approaches
• Detailed reports and documentation that can be shared with buyers, investors, or lenders to support negotiations

This combination of credibility, compliance, and market knowledge is why professional valuations are often considered the standard for high-value or high-stakes transactions.

Cost considerations

Professional valuations typically cost $3,000 – $15,000 depending on business complexity, but can pay for themselves by maximizing your sale price or preventing costly mistakes.

Valuing a business is not a complete science

Knowing what your business is worth creates a solid foundation for big financial decisions—whether you’re planning to sell, attract investors, or chart a growth strategy. Valuation isn’t one-size-fits-all, and a thoughtful approach helps you avoid underestimating or overstating your position.

• Multiple methods: Relying on just one formula can give a narrow view. Using 2–3 different valuation approaches (such as income, market, and asset-based methods) provides a more accurate picture.
• Industry matters: Each sector has its own benchmarks. For example, SaaS businesses often use revenue multiples, while brick-and-mortar retailers may lean more on asset values.
• Professional help: If your business structure is complex, with multiple revenue streams or intellectual property, a valuation expert can apply advanced methods and ensure accuracy.
• Regular updates: Business value isn’t static. Reviewing valuations regularly helps you measure progress, spot risks early, and stay prepared for opportunities like partnerships or funding rounds.

Use Xero to gather accurate financial data

Your valuation is only as good as your financial records. Xero accounting software automatically generates the balance sheets, profit and loss statements, and cash flow reports you need for accurate business valuation. Clean, up-to-date financials make the valuation process faster and more reliable.

Whether you're planning to sell or simply want to track your business's growing value, having organized financial data is essential.

Try Xero for free to streamline your financial reporting and keep your valuation data ready when you need it.

FAQs on business valuation

Still have questions about finding your business's worth? Here are answers to some common questions.

How many times profit is a business worth?

There's no single answer, as the multiplier depends on your industry, business stability and growth potential. For example, a service business might sell for two or three times its annual profit, while a manufacturing company with significant assets could be four or five times its profit.

How can I increase my business's valuation?

Focus on improving the fundamentals. You can boost your valuation by increasing profitability, documenting your processes so the business does not depend on you, growing your customer base and maintaining clean, accurate financial records.

Is a business valuation the same as its selling price?

Not necessarily. A valuation is a calculated estimate of your business's economic worth. The final selling price is what a buyer is willing to pay, which depends on negotiation, market demand and how well your business fits their goals.