Business Valuation: Six Methods to Value Your Business

Published Thursday 5 February 2026

Table of contents

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

Key takeaways

• Choose the right valuation method based on your business type and purpose—use earnings-based valuation for profitable service businesses, times-revenue for high-growth startups, and book valuation for asset-heavy companies like manufacturing or real estate.
• Calculate your business value by multiplying annual earnings by an industry multiplier, which typically ranges from 2x for basic service businesses to 7x or higher for companies with strong competitive advantages or proprietary assets.
• Factor in qualitative elements like customer loyalty, market position, and growth potential when determining final value, as these can significantly increase or decrease what buyers will actually pay beyond your calculated valuation.
• Hire a professional valuator for high-stakes situations like selling your business, bringing on investors, legal proceedings, or securing financing, as their credible assessment provides stronger negotiating positions and reduces legal risk.

What is a business valuation?

Business valuation is the process of determining your company's monetary worth. This calculation helps you make informed decisions about selling, investing, or planning for your business's future.

Here are the most common reasons you might need a valuation:

• Sell your business: set a realistic asking price based on objective data
• Seek : demonstrate your company's worth to potential investors
• Meet legal requirements: satisfy financial reporting and compliance obligations
• Plan for succession: support ownership transfers, buy-sell agreements, and tax planning
• Secure financing: provide lenders with credible collateral valuations

A valuation differs from a selling price. It provides a starting point for negotiations, but the final price depends on market demand, competition, and timing.

External factors also play a role. Intangible assets, future growth prospects, and events like trade tensions can all shift what a buyer is willing to pay. For example, IRS guidance suggests some valuation techniques are insufficient if better evidence is available to determine the value of intangibles.

Six methods to value your business

You can value your business using asset-based, income-based, or cost-based approaches. Here are six proven methods, each suited to different business types and goals.

1. Book valuation

Book valuation calculates your business worth based on what it owns minus what it owes. The formula is straightforward:

Value = assets – liabilities

This method treats your business as the sum of its tangible and intangible assets after accounting for all debts.

Assets include:

• land, buildings, vehicles, equipment, and inventory
• cash and accounts receivable (money customers owe you)
• intellectual property like copyrights, trademarks, and patents

Liabilities include:

• business loans and credit lines
• taxes owed and accounts payable (unpaid bills)

Example calculation: 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 today, sold all assets, and paid off all debts. It represents your business's floor value in a forced-sale scenario.

Unlike book value, which uses purchase price minus depreciation, liquidation value reflects current market prices for your assets.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier. This is one of the most common methods for service businesses and established companies with consistent profits.

Formula: value = earnings × multiplier

Multipliers vary by business type. Here are typical ranges:

• Low (2–3x): basic service businesses in highly competitive markets
• Medium (4–6x): established businesses with steady, recurring customers
• High (7x+): businesses with strong competitive advantages or proprietary assets

Several factors can increase your multiplier:

• Customer loyalty: long-term contracts or 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'll also need to decide which earnings figure to use:

• Net profit: your bottom-line earnings after all expenses (more conservative)
• Earnings before interest, taxes, depreciation, and amortisation (EBITDA): typically higher, 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 based on annual sales rather than profit. This method works well for high-growth businesses that aren't yet profitable.

Formula: value = revenue × multiplier

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow (the money left after operating expenses and business investments) instead of profit or revenue.

Formula: value = free cash flow × multiplier

DCF valuation is less common for small businesses for several reasons:

• Complex analysis: requires detailed financial records beyond basic profit and loss
• Professional help: often needs a qualified valuator to calculate accurately
• Data requirements: needs comprehensive records of capital expenditures and cash flows

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, that sets a baseline for its current value.

Factor in the time and investment needed to develop customer relationships and goodwill—these take years to build and add real value.

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

Which valuation method should you use?

The right method depends on your business type and why you need the valuation. There's no single correct answer; sometimes combining methods gives you the most realistic picture.

Different business types suit different valuation methods. Match your method to your business:

• Asset-heavy businesses (manufacturing, real estate): use book or liquidation valuation when value is tied to 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 DCF to account for future potential, even without current profits

Start by deciding why you need a valuation. Your purpose (selling, seeking investment, or planning succession) will guide you to the most suitable method.

Factors that affect business value

Your calculated valuation is a starting point. Several qualitative factors can increase or decrease what buyers will actually pay.

• Customer concentration: diversified customer bases reduce risk and increase value
• Market conditions: industry trends and economic climate affect buyer appetite
• Competitive position: unique advantages or market share command higher prices
• Growth potential: strong pipelines or expansion opportunities add value
• Owner dependence: businesses that run without the owner are worth more

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

When to hire a professional valuator

A chartered business valuator (CBV) provides an objective, defensible assessment that holds up in negotiations and legal proceedings. The CBV designation is recognised as one of the qualifying valuation exams for other prestigious credentials. Consider hiring a professional when you need credibility beyond a self-calculated estimate.

Hire a professional valuator when you:

• sell your business and need a credible starting point for negotiations
• bring on investors or partners and need to determine share prices
• face a legal process like divorce, shareholder disputes, or estate planning
• apply for financing that requires a formal, third-party valuation

A professional valuation costs more upfront but can pay for itself through stronger negotiating positions and reduced legal risk.

Make informed business decisions with Xero

Accurate financial records are the foundation of any business valuation, which is why are required or permitted for financial reporting in over 130 countries. Whether you're planning for growth, considering a sale, or seeking investment, real-time visibility into your finances puts you in control.

With Xero, you can generate balance sheets instantly, track cash flow, and access the reports you need for any valuation method, without waiting for year-end.

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 a business.

How do you calculate business valuation?

Multiply your annual revenue or profit by an industry multiplier. For example, $500,000 in revenue with a 2x multiplier equals a $1 million valuation. The right 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 annual sales is typically worth $250,000 to $1 million, depending on profitability and industry. Using a times-revenue multiplier of 0.5 to 2x gives this range. For a more accurate figure, use earnings-based valuation—if that $500,000 generates $100,000 profit with a 3x multiplier, the value is $300,000.

Is a business worth 3 times profit?

Not always: 3x profit is a common benchmark, but multipliers range from 2x to 7x or higher. Stable businesses with loyal customers often command higher multipliers, while newer or riskier businesses get lower ones. Your industry, growth prospects, and competitive advantages determine the right number.

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

A business with $1 million in sales is typically worth $500,000 to $2 million or more, depending on profitability and industry. A high-margin tech company commands a much higher valuation than a low-margin retail business with the same revenue.

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

A valuation is a calculated estimate; market value is what a buyer actually pays. Your valuation provides a starting point for negotiations, but the final selling price depends on buyer demand, competition, and timing. Two identical valuations can result in very different sale prices.