How to value a business: six methods with examples

Published Friday 13 February 2026

Table of contents

• What is a business valuation?
• Why you need a business valuation
• 6 methods to value your business
• Which valuation method should you use?
• When to hire a professional valuator
• Factors that affect business value
• Make informed business decisions with Xero
• FAQs on business valuation

Key takeaways

• Choose your valuation method based on your business type and purpose: use book or liquidation valuation for asset-heavy businesses, earnings-based valuation for profitable service companies, and times-revenue or discounted cash flow for high-growth startups or tech companies.
• Apply multiple valuation methods to get a realistic picture of your business worth, as no single method provides the complete answer and combining approaches helps validate your estimates.
• Consider factors beyond financial calculations that significantly affect value, including customer loyalty, brand reputation, competitive advantages, management team strength, and current market conditions.
• Hire a professional chartered business valuator for high-stakes situations like selling your business, bringing on investors, legal proceedings, or when you have complex business structures that require credible, defensible assessments.

Key takeaways

• Estimate your business's value using six main methods
• Choose your valuation method based on business type, available data, and goals
• Consider factors beyond calculations, such as customer loyalty, competitive advantages, and market conditions
• Hire a professional valuator for high-stakes transactions, legal requirements, or complex business structures

What is a business valuation?

Business valuation is the process of determining how much your company is worth in monetary terms. Understanding your business value helps you make informed decisions about your company's future.

A business valuation does not establish a selling price. It may play a role in negotiations, but the final selling price depends on demand, competition, intangible assets, future prospects, and market conditions.

Why you need a business valuation

A business valuation gives you a clear picture of what your company is worth, so you can make confident decisions about its future. Here are common situations where you might need one:

• Selling your business: Set a realistic asking price and support your negotiations with data
• Seeking investment: Show potential investors what your company is worth and justify your share price
• Meeting legal requirements: Satisfy financial reporting, divorce proceedings, or shareholder disputes
• Planning for succession: Determine ownership stakes for buy-sell agreements, estate planning, or ownership transfers
• Securing financing: Provide lenders with collateral valuations to support loan applications

The right time to get a valuation depends on your situation. If you're preparing to sell, seek investment, or enter a legal process, start early so you have time to gather accurate financial data.

6 methods to value your business

There are six main methods to value a business. The right one depends on your business type, available data, and the purpose of the valuation.

1. Book valuation

Book valuation calculates your business worth using the formula: value = assets − liabilities. This method treats your business as the sum of everything it owns minus everything it owes.

Here's what to include in your calculation.

What counts as assets

• Land, buildings, vehicles, equipment, and inventory
• Cash and accounts receivable (money customers owe you)
• Intellectual property such as copyrights, trademarks, and patents

Liabilities include the following.

What counts as liabilities

• Business loans and credit lines
• Taxes owed and accounts payable (unpaid bills)

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 calculates what you'd receive if you closed your business, sold all assets, and paid off all debts. It's similar to book value but reflects current market prices, which are often adjusted downward with discounts from 10–40% to account for the urgency of a forced sale.

This method is useful when you need to understand the minimum your business is worth in a forced-sale scenario.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier. Average earnings multiples range from 2 to 3.3 across popular sectors, according to BizBuySell's industry valuation data, with a cross-sector average of 2.57. The formula is: value = earnings × multiplier.

Multipliers vary by business type.

Multiplier ranges

• Low (2 to 3x): Basic service businesses with high competition
• Medium (4 to 6x): Established businesses with steady customers
• High (7x+): Businesses with strong competitive advantages

Several factors can push your multiplier higher.

Factors that increase multipliers

• Customer loyalty: Long-term, repeat customers
• 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 in your calculation.

Earnings options

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

Example: If your business earns $350,000 annually with 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. The formula is: value = revenue × multiplier.

This method is useful for businesses that aren't yet profitable or have inconsistent earnings. Revenue multiples range from 0.42x to 1.2x, depending on your industry, growth rate, and profit margins. See BizBuySell's industry valuation multiples for current small business sales data.

Example: A business with $500,000 in annual revenue and a 1.5x multiplier would be valued at $750,000.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation, a method that gained popularity after the 1929 stock market crash, uses free cash flow instead of profit or revenue.

The formula is: value = free cash flow × multiplier

DCF has some limitations for smaller companies.

Why this method is less common for small businesses

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

When to use this method: DCF works best for businesses with significant equipment, property, or technology investments where maintenance costs vary from year to year.

6. Entry-cost valuation

Entry-cost valuation estimates what it would cost to start a business like yours from scratch. If you could build an equivalent business for $50,000, then the existing business is probably worth around $50,000.

This method also considers the time and investment needed to build customer relationships and develop goodwill.

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

Which valuation method should you use?

The right valuation method depends on your business type and goals. There's no single correct answer, and sometimes a combination of methods gives you the most realistic picture.

• Asset-heavy businesses (manufacturing, real estate): Use book or liquidation valuation because value is tied up in physical assets
• Service-based businesses with consistent profits: Use earnings-based valuation to reflect income-generating ability
• High-growth startups or tech companies: Use times-revenue or discounted cash flow to account for future potential, even without current profitability

Start by deciding why you need a valuation. This will help you choose the most suitable method.

When to hire a professional valuator

A chartered business valuator (CBV) provides an objective, defensible assessment of your company's worth, often following professional guidelines like the AICPA's Statement on Standards for Valuation Services. While DIY valuations work for basic planning, some situations require professional expertise.

Hire a professional when you:

• Sell your business and need a credible starting point for negotiations
• Bring on investors or partners and need to determine share prices
• Go through a legal process such as divorce, shareholder disputes, or estate planning
• Apply for financing that requires a formal valuation
• Have a complex business structure with multiple entities or unusual assets

Professional valuators offer several advantages.

Benefits of professional valuation

• Credibility: Third-party assessment carries more weight with buyers and lenders
• Accuracy: Professionals use multiple methods and industry benchmarks
• Defensibility: Formal valuations stand up to legal and tax scrutiny

Prepare your financial data: Before hiring a valuator, gather accurate financial records. Xero cloud accounting software generates balance sheets and reports instantly, so you don't have to wait for year-end data from your accountant.

Factors that affect business value

Business valuations provide estimates, not guarantees. Many factors beyond formulas affect what buyers will actually pay for your business.

Intangible factors

• Customer relationships: Loyal, long-term customers increase value
• Brand reputation: Strong brand recognition commands higher prices
• Competitive advantages: Patents, exclusive contracts, or unique processes
• Management team: Experienced leadership that can operate without the owner

External market conditions also play a significant role.

Market conditions

• Industry trends: Growing industries attract higher valuations
• Economic climate: Recessions and uncertainty can reduce buyer appetite
• Competition: More buyers competing for businesses can drive prices up
• Timing: Seasonal factors and market cycles affect sale prices

These factors explain why two businesses with identical financials can sell for very different prices.

Make informed business decisions with Xero

Understanding your business's value helps you make confident decisions about its future. Whether you're planning for growth, considering a sale, or seeking investment, clear financial data puts you in control.

Xero cloud accounting software gives you real-time reports, including balance sheets essential for most valuation methods. Track your performance, manage cash flow, and see the full picture of your financial health.

Get one month free of Xero and see how easy it is to manage your business finances.

FAQs on business valuation

Here are answers to common questions about valuing your business.

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

A business with $500,000 in annual sales could be worth $250,000 to $1.5 million, depending on profitability and industry. Using a revenue multiplier of 0.5x to 3x gives you this range. More profitable businesses with strong growth prospects command higher multipliers.

How much is a business worth that makes $100,000 a year?

A business earning $100,000 annually could be worth $200,000 to $500,000 or more. Using an earnings multiplier of 2x to 5x gives you this range. Stable businesses with loyal customers and growth potential typically command higher multipliers.

Is a business worth 3 times profit?

Sometimes, but it's not a universal rule. A 3x profit multiplier is a common benchmark, but real-world data shows multipliers can range from 1.5 on the low end to over 5x for select high-value categories, depending on the industry, growth prospects, and customer loyalty. Stable, established businesses typically command higher multipliers than newer or riskier ones.

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

A business with $1 million in sales could be worth $500,000 to $3 million or more. The value depends on profitability, industry, and growth potential. A high-margin tech company will be worth far more than a low-margin retail business with the same revenue.

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

A business valuation is a calculated estimate; market value is what a business actually sells for. Valuations use methods and financial data to estimate worth, while market value depends on what a buyer is willing to pay. A valuation informs negotiations, but the final price is set by the market.