How to value a company: six methods, examples, formulas

Published Friday 20 February 2026

Table of contents

• What is a company valuation?
• Why value your company
• When to value your company
• How to choose the right valuation method
• Factors that affect your company's value
• How to prepare for a company valuation
• When to hire a professional valuator
• Use Xero to simplify your company valuation
• FAQs on company valuations

Key takeaways

• Apply multiple valuation methods together to get the most accurate picture of your company's worth, as each method (book value, earnings multiples, revenue multiples, and cash flow analysis) captures different aspects of your business value.
• Prepare accurate and up-to-date financial records before any valuation, including clean balance sheets, profit and loss statements, and cash flow statements, as these form the foundation for credible valuation calculations.
• Recognise that industry-specific multipliers vary significantly when using earnings or revenue-based valuations, so consult with local accountants or business brokers to understand typical ranges for your specific business type.
• Consider hiring a professional valuator when you need certified figures for legal purposes, selling your business, seeking significant investment, or dealing with complex assets and intellectual property.

What is a company valuation?

A company valuation is an estimate of your business's monetary worth. It gives you a baseline figure for decision-making, though it doesn't set or guarantee a sale price.

You can use your valuation for financial reporting, seeking finance, and negotiating during a sale.

Why value your company

Understanding your company's value isn't just for when you're ready to sell. It gives you a clear picture of your business's financial health, helping you make smarter decisions. This is crucial given that small and medium-sized businesses constitute 90% of all enterprises worldwide.

A valuation can be a powerful tool when you're seeking investment, applying for a loan, or planning for the future. It provides a benchmark to track growth and highlights areas where you can improve.

When to value your company

There are specific moments in your business journey when a formal valuation is particularly useful. Consider getting a valuation if you are:

• Preparing to sell your business
• Bringing on a new partner or investor
• Applying for a business loan or line of credit
• Creating an estate plan or will
• Offering shares to employees

Knowing your company's worth at these key times ensures you negotiate from a position of strength and clarity.

Here are six common methods for valuing your company.

1. Book value calculation

Book value is the net worth of your company based on its balance sheet. Calculate it by subtracting total liabilities from total assets.

Book value formula

Book value formula:

Book value = Total assets − Total liabilities

This gives you the net value of everything your company owns after subtracting what it owes.

include:

• property and equipment
• inventory and cash reserves
• accounts receivable
• intellectual property (patents, trademarks)

include:

• loans and debts
• unpaid taxes
• accounts payable (bills you owe)

Example: If your business owns $10m in assets and owes $5m in debts, the book value is $5m.

2. Liquidation value calculation

Liquidation value estimates what you'd receive if you sold all assets at current market prices and repaid all debts. Unlike book value, it reflects what buyers would actually pay today.

This concept is formalised in international accounting standards, which use a fair value hierarchy that gives the highest priority to quoted prices in active markets.

Market value fluctuates based on:

• changes in demand
• increased competition
• obsolete technology
• market disruption

This makes liquidation value useful for worst-case planning or when considering closing the business.

Liquidation valuation formula

Liquidation value formula:

Liquidation value = Current market value of all assets − Total liabilities

Use realistic sale prices for assets, not book values, to get an accurate figure.

3. Multiply company earnings

Earnings-based valuation calculates your company's worth as a multiple of its annual profits. This method works well for profitable businesses with consistent earnings history.

Earnings-based calculation formula

Earnings-based formula:

Company value = Annual earnings × Multiplier

Use either net profit or earnings before interest, taxes, depreciation, and amortisation (EBITDA) as your earnings figure, depending on industry standards.

Earnings figures you can use:

• Net profit: your bottom-line profit after all expenses
• Earnings before interest, taxes, depreciation, and amortisation (EBITDA): your earnings before these deductions

Multiplier ranges typically fall between 2x and 10x. Higher multiples apply to businesses with:

• loyal customer bases
• market exclusivity
• protected intellectual property
• hard-to-replicate advantages

Your industry often has standard multipliers. A local accountant or business broker can advise on typical ranges for your business type.

4. Multiply company revenue

Revenue-based valuation (also called times-revenue) calculates your company's worth by multiplying annual revenue by an industry-specific factor. This approach works well for businesses that aren't yet profitable or have inconsistent earnings.

Times-revenue formula

Times-revenue formula:

Company value = Annual revenue × Multiplier

Industry-specific multipliers vary widely. A local accountant or business broker can advise on typical ranges for your business type.

5. Multiply free cash flow

Free cash flow valuation measures your company's worth based on the cash remaining after operating costs and planned capital expenditure. This method shows whether your business can fund growth and improvements from its own operations.

Free cash flow formula

Free cash flow formula:

Company value = Free cash flow × Multiplier

Free cash flow equals operating cash flow minus capital expenditures. This figure shows how much cash your business generates beyond what's needed to maintain operations.

This method is best used when:

• your business needs significant upgrades (equipment, renovations, technology)
• you want to show funding capacity for growth
• buyers need to understand cash generation potential

Note: Calculating free cash flow requires detailed analysis of planned capital expenditures. Consider working with an accountant for accurate figures.

6. Entry-cost analysis

Entry-cost analysis values your company based on what it would cost to recreate it from scratch. This includes capital expenses plus adjustments for customer acquisition and brand building.

This method is best suited for:

• asset-heavy businesses (manufacturing, printing, retail)
• companies without significant intangible assets
• negotiations from a buyer's perspective

This method works better for businesses without hard-to-replicate elements like key relationships, proprietary information, or established goodwill. Regulatory bodies like the SEC have expressed concern about its reliability and its ability to capture all relevant costs.

How to choose the right valuation method

With several methods available, the right one for your business depends on your industry, size, and reason for the valuation.

For example, asset-heavy businesses might lean on book or liquidation value. Profitable, service-based companies often use an earnings multiplier. Startups with high growth but low profit may prefer a revenue multiplier.

Often, the most accurate picture comes from using a combination of methods to arrive at a valuation range.

Factors that affect your company's value

A formula only tells part of the story. Several other factors can increase or decrease your company's worth, including:

• Financial performance: Consistent revenue and profit growth are key.
• Customer base: A diverse and loyal customer base reduces risk.
• Industry trends: A growing industry can lift your valuation.
• Brand reputation: Strong goodwill and brand recognition are valuable assets.
• Operational efficiency: Streamlined processes and reliable systems make a business more attractive.

How to prepare for a company valuation

To get the most accurate valuation, your financial records need to be in order. Start by ensuring your bookkeeping is up to date. You'll need clean, organised financial statements, including your balance sheet, profit and loss statement, and cash flow statement.

Using accounting software makes it easy to pull these reports and gives you confidence that the numbers are accurate and reliable.

When to hire a professional valuator

The methods in this guide give you a baseline understanding, but professional valuations provide:

• certified, defensible figures for legal or financial purposes
• industry-specific expertise and comparable sale data
• detailed analysis of intangible assets and goodwill
• reports that satisfy lenders, investors, or courts

Consider hiring a professional in these situations:

• you're selling the business or seeking significant investment
• you need valuation for legal purposes (divorce, estate, litigation)
• your business has complex assets or intellectual property
• you're negotiating high-stakes transactions

Valuation estimates don't guarantee sale prices. Buyers may pay more or less depending on negotiation, timing, and market conditions. Your valuation sets a baseline for informed discussions.

You can find qualified accountants and business valuers in the Xero advisor directory.

Use Xero to simplify your company valuation

A credible valuation starts with accurate financial data. Xero makes it easy to keep your books organised and generate the reports you need, like the balance sheet and profit and loss statement. With real-time insights into your financial health, you're always prepared to assess your company's worth.

Get the clarity you need to grow your business. Get one month free.

FAQs on company valuations

Here are answers to some common questions about valuing a company.

How do you estimate the value of a small company?

For a small company, you typically start by calculating its book value (assets minus liabilities). Then, you might apply an earnings or revenue multiplier based on industry standards. Combining a few methods gives the most realistic estimate.

Is a business worth 5 times its profit?

The '5x profit' guideline is a common starting point, but it's not universal. The right multiplier depends heavily on your industry, growth potential, and market conditions. Some businesses may be worth much more, while others might be worth less.

What are the main methods of valuation?

The most common methods include asset-based valuations (like book value), earnings-based valuations (multiplying profit or EBITDA), and revenue-based valuations (multiplying sales). The best approach often involves using a mix of these methods.