How to value a business: six methods with examples

Published Friday 20 February 2026

Table of contents

• What is a business valuation?
• 6 methods to value your business
• How to calculate your business value
• Which valuation method should you use?
• When to hire a professional valuator
• Factors that affect business value
• FAQs on business valuation

Key takeaways

• Choose your valuation method based on your business type and goals: use earnings-based methods for profitable service businesses, asset-based methods for companies with significant physical assets, and times-revenue methods for high-growth businesses with variable profits.
• Apply multiple valuation methods to get the most accurate picture of your business worth, as using just one method may not capture the full value of factors like customer loyalty, brand reputation, or market position.
• Gather three to five years of financial documents including profit and loss statements, balance sheets, and cash flow statements before starting any valuation, as accurate data forms the foundation of reliable business valuation.
• Hire a professional valuator for high-stakes situations like selling your business, bringing on investors, legal disputes, or securing financing, as their objective assessments meet professional standards and withstand scrutiny from buyers and lenders.

What is a business valuation?

Business valuation is how you determine what your company is worth in monetary terms. This process is often guided by professional standards, like the International Valuation Standards, that enhance quality, comparability, and transparency. Understanding this value helps you make informed decisions about selling, seeking investment, or planning for the future.

Common reasons you might need to value your business:

• Selling your business: set a realistic asking price based on calculated worth
• Seeking investment: show potential investors your company's value
• Meeting legal requirements: satisfy accounting and compliance obligations, which often rely on standards that are regularly updated by international valuation boards
• Planning for succession: support ownership transfers and buy-sell agreements
• Securing loans: provide lenders with credible collateral valuations

A business valuation provides a starting point, separate from the final selling price. It offers a foundation for negotiations, but the final price depends on demand, competition, and market conditions.

Intangible factors also play a role. Future growth prospects, customer relationships, and external events like trade tensions can all affect what a buyer is willing to pay.

6 methods to value your business

There are three main approaches to valuing a business: asset-based, income-based, and cost-based. Here are six proven methods that fall within these categories.

1. Book valuation

Book valuation calculates your business worth using a simple formula: assets minus liabilities. This method treats your business as the sum of what it owns minus what it owes.

Assets include:

• physical property: land, buildings, vehicles, equipment, inventory
• financial assets: cash and accounts receivable
• intellectual property: copyrights, trademarks, patents

Liabilities include:

• debt obligations: business loans and credit lines
• outstanding payments: taxes owed and accounts payable

For example: If your business has $10 million in assets and $5 million in debts, your book value is $5 million.

2. Liquidation value

Liquidation value estimates what you'd receive if you closed your business, sold all assets, and paid off debts. This method is useful when you need to understand the minimum value of your business. Unlike book value, it reflects current market prices rather than the original purchase price minus how much assets have depreciated.

3. Earnings-based valuation

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

Formula: value = earnings × multiplier

Typical multiplier ranges:

• 2–3x: basic service businesses with high competition
• 4–6x: established businesses with steady customers
• 7x+: businesses with strong competitive advantages

Several factors can increase your multiplier:

• Customer loyalty: long-term relationships with repeat buyers
• Market position: local exclusivity or dominant market share
• Intellectual property: patents, trademarks, or proprietary processes
• Business model: hard-to-replicate operations or systems

You can use different earnings figures:

• Net profit: bottom-line earnings after all expenses
• Earnings before interest, taxes, depreciation, and amortisation (EBITDA): typically higher than net profit and often preferred by buyers

Example: If your business earns $350,000 annually and uses a 2x multiplier, the value is $700,000. With a 5x multiplier, the value is $1,750,000.

4. Times-revenue valuation

Times-revenue valuation calculates your business worth by multiplying annual revenue by an industry multiplier.

Formula: value = revenue × multiplier

This method works well for businesses with consistent sales but variable profits. Multipliers typically range from 0.5x to 2x for most industries, though high-growth sectors may command higher multiples.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow rather than profit or revenue. Free cash flow is the money left after paying operating expenses and reinvesting in your business.

Formula: value = free cash flow × multiplier

DCF is less common for small businesses for several reasons:

• Requires detailed financial analysis beyond basic profit and loss
• Often needs help from a professional valuator
• Demands comprehensive records of capital expenditures

DCF works best for businesses with significant equipment, property, or technology investments where maintenance costs vary year to year.

6. Entry-cost valuation

Entry-cost valuation estimates what it would cost to build an equivalent business from scratch. If you could replicate your business for $50,000, then the existing business is likely worth around that amount.

This method should also factor in the time and effort needed to develop customer relationships and goodwill.

Use entry-cost as a sense-check: If your times-revenue method shows $300,000 but entry-cost shows $100,000, you may need further analysis to find the true value.

How to calculate your business value

Ready to find out what your business is worth? Follow these steps to get a clear estimate.

1. Gather your financial documents. Collect your profit and loss statements, balance sheets, and cash flow statements for the last three to five years. Having accurate data is the first step to reliably valuing your business.
2. Choose a valuation method. Select one or more of the methods described above. An earnings-based method is common for profitable businesses, while an asset-based method might suit a company with significant equipment or property.
3. Calculate. Apply the formula for your chosen method. For example, if you use an earnings-based method, multiply your annual profit by a suitable industry multiplier.
4. Adjust for other factors. Consider intangible assets like your brand reputation, customer loyalty, and market position. These can increase or decrease your business's final value.
5. Get a professional opinion. If you need a formal assessment or have a complex business, consider hiring a professional. They can provide an objective assessment that stands up to scrutiny from buyers, investors, or lenders.

Which valuation method should you use?

The right valuation method depends on your business type and goals. Using a combination of methods often gives the most realistic picture.

• Asset-heavy businesses (manufacturing, real estate): Use book or liquidation valuation when value is tied to physical assets
• Service-based businesses: Use earnings-based valuation when you have strong, consistent profits
• High-growth startups: Use times-revenue or DCF to account for future potential, even without current profitability

Start by deciding why you need to value your business. Your purpose will guide you to the most suitable method.

When to hire a professional valuator

While you can estimate your business's value on your own, sometimes you need someone to formally and objectively assess it. A professional valuator objectively assesses your company's worth in a way that's defensible. Consider hiring a Chartered Business Valuator (CBV) or certified appraiser if you're:

• selling your business and need a credible starting point for negotiations
• bringing on investors or partners and need to determine share prices
• going through a legal process such as divorce, shareholder disputes, or estate planning
• applying for financing that requires a formal valuation
• dealing with complex business structures or significant intellectual property

Professional valuations that adhere to official guidelines, like the American Institute of Certified Public Accountants' (AICPA) Standards for Valuation Services, stand up to scrutiny. While do-it-yourself methods work well for internal planning, high-stakes decisions benefit from expert analysis.

Factors that affect business value

When you calculate a valuation, you get a number, but the true worth of your business is also shaped by factors that are harder to quantify. These elements can significantly influence what a buyer is willing to pay.

• Market conditions: The overall health of the economy and your industry can impact value. A growing market often leads to higher valuations.
• Customer loyalty: A business with a strong base of repeat customers is less risky and therefore more valuable.
• Brand reputation: A well-respected brand can command a premium. Positive reviews and strong word-of-mouth are valuable assets.
• Competitive advantage: Unique products, proprietary technology, or a prime location can set you apart from competitors and increase your worth.
• Employee expertise: A skilled and stable team is a major asset that reduces risk for a new owner.

Understanding your business's value helps you make smart decisions for its future. Whether you're planning for growth, considering a sale, or seeking investment, having a clear view of your finances puts you in control.

With real-time data and easy-to-read reports, you can track your performance, manage cash flow, and see the full picture of your financial health. Your balance sheet shows your book value and is essential for most valuation methods.

Get one month free and see how Xero makes managing your business finances straightforward.

FAQs on business valuation

Here are answers to common questions about valuing your business.

How do you estimate the value of a business?

Multiply your annual revenue or profit by an industry-standard multiplier. For example, a business with $500,000 in revenue and a 2x multiplier would be valued at $1 million. The specific multiplier depends on your industry, profitability, and growth potential.

How much is a business worth with $500,000 in sales?

A business with $500,000 in sales could be worth $250,000–$1.5 million, depending on profitability, industry, and market conditions. Use the times-revenue or earnings-based methods for more accurate estimates.

Is a business worth 3 times profit?

A 3x profit multiplier is a common benchmark, though multipliers vary by industry and situation. Stable businesses may command 4–5x, while newer or riskier businesses might see 2x or lower, depending on industry and growth prospects.

How much is a business worth that makes $100k a year?

If your business generates $100,000 in annual profit, it might be valued at $200,000–$500,000. Stable businesses in low-risk industries may command 4–5x multipliers, while newer or higher-risk businesses might see 2–3x.

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

A business with $1 million in sales could be worth $500,000–several million dollars. Profitability matters more than revenue alone; a high-margin tech company is worth far more than a low-margin retailer with identical sales.

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

When you value a business, you calculate an estimate based on financial data and formulas. Market value is the actual price a business sells for. While valuing your business informs how you negotiate, the final price depends on what a buyer is willing to pay.