How to value a company: methods, formulas, examples

Published Monday 23 February 2026

Table of contents

• What is a company valuation?
• When you need a business valuation
• How to value a company
• Choosing the right valuation method
• What affects your company's value
• When to get a professional valuation
• Prepare accurate valuations with Xero
• FAQs on valuing a company

Key takeaways

• Use multiple valuation methods to get a complete picture of your business worth, as each method serves different purposes: asset-based methods work best for businesses with significant physical assets, earnings-based methods suit profitable established companies, and revenue-based methods help value high-growth businesses that aren't yet profitable.
• Focus on improving key value drivers like customer diversification, competitive advantages, and financial health, since businesses with loyal customer bases, protected intellectual property, clean financial records, and reduced customer concentration typically command higher valuations.
• Calculate book value yourself using your balance sheet by subtracting total liabilities from total assets, but hire a certified professional valuator when you need accuracy for major transactions like selling your business, seeking investment, or handling legal matters.
• Review your business valuation annually or whenever significant changes occur, as regular valuations help you track progress, set realistic expectations, and prepare for future opportunities while understanding that valuations are estimates rather than guaranteed sale prices.

What is a company valuation?

A company valuation is an estimate of your business's monetary worth. It doesn't set or guarantee a sale price, but you can use the number for financial reporting, seeking finance, and negotiating when you sell.

When you need a business valuation

Business valuations help you make informed decisions during major transitions. You may need one when:

• Selling your business: establish a fair asking price and strengthen negotiations
• Seeking investment or loans: show lenders and investors what your business is worth
• Bringing in partners: determine equity stakes and buy-in amounts
• Planning your exit: understand your business's value for retirement or succession planning
• Handling legal matters: support divorce proceedings, estate planning, or partnership disputes
• Making strategic decisions: assess whether to expand, merge, or acquire another business

Even if you're not planning a transaction, knowing your business's value helps you track growth and set goals.

How to value a company

Here are eight common methods for calculating what a business is worth:

Book value calculation

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

Use this formula to calculate book value:

Book value formula

Book value = Assets − Liabilities

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

Assets include:

• property
• inventory
• equipment
• cash reserves
• accounts receivable
• intellectual property like patents

Liabilities include:

• loans
• 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.

Liquidation value calculation

Liquidation value is what owners would receive after selling all assets at current market prices and repaying all debts. Unlike book value, it reflects what assets are actually worth today rather than their recorded value.

Market value can fluctuate based on:

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

Use this formula to calculate liquidation value:

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

Multiply company earnings

Earnings-based valuation calculates your company's worth by multiplying annual profits by an industry-specific number. This method works well for profitable, established businesses.

Use this formula for earnings-based valuation:

Earning-based calculation formula

Company value = Earnings × Multiplier

Two variables determine your valuation:

• Earnings figure: use either net profit or EBITDA (earnings before interest, taxes, depreciation, and amortisation)
• Multiplier: ranges from 2x to more than 10x depending on your industry

Businesses with these characteristics typically receive higher multipliers:

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

Multiply company revenue

Revenue-based valuation (also called times-revenue) multiplies your annual sales by an industry multiplier. This method works well for high-growth businesses or those not yet profitable.

Use this formula for revenue-based valuation:

Times-revenue formula

Company value = Annual revenue × Multiplier

Industry-specific multipliers vary widely. A local accountant or business broker can tell you the typical range for your type of business.

Multiply free cash flow

Free cash flow valuation uses the money left after covering operating costs and planned capital expenditure. This method shows whether your business can fund improvements like new equipment, a shop refit, or a digital makeover while covering usual expenses.

Use this formula for free cash flow valuation:

Free cash flow formula

Company value = Free cash flow × Multiplier

Calculating free cash flow requires detailed analysis to determine what capital expenditures your business needs. An accountant can help with this assessment.

Entry-cost analysis

Entry-cost analysis estimates what it would cost to recreate your business from scratch, including capital expenses, customer acquisition, and brand building.

This method works best for businesses that drive value through physical assets. For example, a printing company's value might closely match the cost of buying a printing press.

Entry-cost analysis isn't suitable for businesses with hard-to-replicate elements like:

• key relationships
• proprietary information
• goodwill
• intellectual property

Market capitalisation

Market capitalisation applies to publicly traded companies only. It reflects a company's value as the total combined price of all its shares.

Use this formula to calculate market capitalisation:

Share price formula

Company value = Share price × Number of shares

Enterprise value calculation

Enterprise value builds on market capitalisation by adjusting for debt and cash reserves. This method also applies only to publicly traded companies.

Use this formula to calculate enterprise value:

Enterprise value formula

Enterprise value = Market capitalisation + Debt − Cash

Enterprise value gives a more complete picture than market cap alone. Analysts often use it alongside the Debt-to-Equity (D/E) ratio to understand how much of a company's operations are financed with debt.

Choosing the right valuation method

The best valuation method depends on your business type, financial situation, and reason for valuing. Here's how to choose:

Use asset-based methods (book value, liquidation value) when:

• your business owns significant physical assets
• you're winding down or selling off assets
• the business isn't currently profitable

Use earnings-based methods when:

• your business has consistent profits over several years
• you want to show what the business generates for owners
• buyers care most about return on investment

Use revenue-based methods when:

• your business is growing quickly but not yet profitable
• you're in an industry where revenue multiples are standard (like SaaS)
• earnings don't reflect the business's true potential

Use free cash flow when:

• you want to show the business can fund growth
• capital expenditure significantly affects profitability
• buyers want to understand available cash after reinvestment

For the most accurate picture, professionals often use multiple methods and compare results. Your accountant can help you decide which approach fits your situation.

What affects your company's value

Two similar businesses can have very different valuations. Here's what drives those differences:

Industry benchmarks: Each industry has typical multiplier ranges. A SaaS company might command 5–10x revenue, while a retail shop might get 1–2x.

• Growth potential: Businesses with strong growth trajectories attract higher valuations. Consistent revenue increases signal future returns.
• Customer concentration: Relying on a few large customers increases risk. Diversified customer bases support higher valuations.
• Competitive advantages: Protected intellectual property, exclusive contracts, or strong brand recognition make your business harder to replicate and more valuable. Research shows that many business owners attach considerable importance to non-financial objectives like reputation, image, and company culture.
• Financial health: Clean books, consistent profits, and manageable debt reassure buyers. Messy finances raise red flags and lower offers.
• Market conditions: Economic trends, interest rates, and industry outlook all affect what buyers are willing to pay. More companies now calculate the shareholder value of sustainability to present alongside traditional financial analysis.

Understanding these factors helps you set realistic expectations and identify ways to strengthen your business's value over time.

When to get a professional valuation

A professional valuation is worth the investment when you need accuracy. Consider hiring a certified valuator for:

• selling your business
• seeking investment or financing
• legal matters like divorce or estate planning
• partnership disputes

For quick estimates or internal planning, you can calculate book value yourself using your balance sheet. Xero lets you create a balance sheet and pull reports on demand.

Keep in mind that valuations are estimates, not guarantees. Buyers may offer more or less than your calculated value during negotiations. A professional valuation strengthens your position but doesn't set the final price.

You can find an accountant near you in the Xero advisor directory.

Prepare accurate valuations with Xero

Whether you're calculating book value or preparing reports for a professional valuator, accurate financial data is essential. Access the figures you need in real time:

• Balance sheets: pull up-to-date asset and liability totals
• Cash flow reports: track free cash flow for valuation calculations
• Financial reports: share accurate data with accountants or buyers

Get one month free and simplify your financial management.

FAQs on valuing a company

Here are answers to common questions about business valuation.

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

It depends on your industry and profitability. Most small businesses sell for 1–3x annual revenue, so a business with $500,000 in sales might be worth $500,000 to $1.5 million before adjustments for profit margins and growth potential.

Is a business worth 5 times profit?

Five times profit is a common starting point, but actual multiples range from 2x to 10x or more. Your industry, growth rate, and risk factors all affect the final number.

Which valuation method is most accurate?

No single method is most accurate for every business. Professionals often use multiple methods and compare results to arrive at a fair range.

Can I use multiple valuation methods?

Yes, and it's often recommended. Comparing results from different methods helps you understand a realistic value range and identify which factors most affect your business's worth.

How often should I revalue my business?

Review your valuation annually or whenever significant changes occur, like major revenue shifts, new contracts, or changes in market conditions. Regular valuations help you track progress and prepare for future opportunities.