How to value a company: methods, formulas and tips

Published Friday 20 February 2026

Table of contents

• What is a company valuation?
• When you need a company valuation
• Main approaches to valuing a company
• Asset-based valuation methods
• Earnings and cash flow valuation methods
• Market-based valuation methods
• Which valuation method should you use?
• Factors that affect your company's value
• Getting help with your valuation
• FAQs on company valuation

Key takeaways

• Choose the right valuation method based on your business type and situation: use asset-based methods for companies with significant physical assets or those that aren't profitable, earnings-based methods for established profitable businesses, and market-based methods when comparable sales data is available.
• Apply multiple valuation approaches to get a complete picture of your company's worth, as different methods often produce different results and professional valuations typically combine several approaches to reach a fair estimate.
• Focus on improving factors that increase your company's value, such as consistent revenue growth, strong profit margins, recurring revenue streams, a diverse customer base, and reducing owner dependency in operations.
• Seek professional help from qualified accountants or business valuers for complex valuations, while handling basic tasks like calculating book value and maintaining accurate financial records yourself.

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 a sale.

Valuation methods often follow international frameworks, such as those provided by the International Valuation Standards Council.

When you need a company valuation

You may need to value your company in several common situations.

• Selling your business: establish a fair asking price and negotiate with buyers.
• Seeking finance: demonstrate your company's worth to lenders or investors.
• Partner buyouts: determine a fair price when a business partner exits.
• Estate planning: establish value for inheritance or succession planning.
• Divorce proceedings: divide business assets fairly.
• Tax purposes: report accurate values for capital gains or other tax obligations.

Understanding your company's value also helps with planning, even when no transaction is imminent.

Main approaches to valuing a company

There are three main ways to approach a company valuation. Each looks at your business from a different angle, and often a combination of methods gives the most complete picture.

Asset-based methods:

• Book value calculation
• Liquidation value calculation

Earnings and cash flow methods:

• Multiply company earnings
• Multiply company revenue
• Multiply free cash flow

Market-based methods:

• Entry-cost analysis
• Market capitalisation
• Enterprise value calculation

Asset-based valuation methods

Asset-based methods determine your company's value by adding up all its assets and subtracting its liabilities. This approach is useful for businesses with significant physical assets.

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 = Assets - Liabilities

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

Assets include:

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

Liabilities include:

• loans and 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 if they sold all assets at current market prices and repaid all debts. Unlike book value, it reflects what assets are actually worth today rather than their recorded value.

Market values fluctuate based on demand, competition, technology changes, and market conditions. This makes liquidation value a more realistic estimate of what you'd actually receive in a sale.

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

Earnings and cash flow valuation methods

These methods value a company based on its ability to generate profit and cash. They are often used for established businesses with a track record of consistent earnings.

Multiply company earnings

Earnings-based valuation calculates your company's worth as a multiple of its annual profits. This method is common for established, profitable businesses.

Earning-based calculation formula

Company value = Earnings x Multiplier

Earnings can be either:

• net profit
• earnings before interest, taxes, depreciation, and amortisation (EBITDA)

Multipliers typically range from 2x to more than 10x. Higher multipliers apply to businesses with:

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

Standard multipliers often exist for specific industries. A local accountant or business broker can advise on the typical range for your type of business.

Multiply company revenue

Revenue-based valuation applies a multiplier to your annual revenue rather than profit. This approach, also called times-revenue valuation, works well for early-stage or low-margin businesses.

Times-revenue formula

Company value = Annual revenue x Multiplier

As with the earning-based calculation, the multiplier plays a big role in your final valuation. There are often accepted industry-specific multipliers. A local accountant or business broker will know the multiplier range for your type of business.

Multiply free cash flow

Free cash flow valuation calculates your company's worth based on the cash remaining after covering operating costs and planned capital expenditure.

Free cash flow formula

Company value = Free cash flow x Multiplier

This method works well for businesses that need upgrades, such as new equipment, a shop refit, or a digital makeover. It shows whether the business can fund improvements beyond its usual operating costs.

Calculating free cash flow requires detailed analysis to determine necessary capital expenditures.

Market-based valuation methods

Market-based methods determine value by comparing your business to similar companies. This approach is helpful for understanding how your business stacks up against the competition.

Entry-cost analysis

Entry-cost analysis values a company by estimating what it would cost to recreate it from scratch. This includes capital expenses, customer acquisition, and brand building.

Entry-cost analysis works well for asset-driven businesses like manufacturing or printing, and for companies without hard-to-replicate advantages.

When entry-cost works well:

• asset-driven businesses like manufacturing or printing
• companies without hard-to-replicate advantages

However, avoid this method for businesses with key relationships or proprietary information, companies with significant goodwill or brand value, and businesses with advantages you can't buy on the open market.

When to avoid this method:

• businesses with key relationships or proprietary information
• companies with significant goodwill or brand value
• businesses with advantages you can't buy on the open market

Market capitalisation

Market capitalisation is the total value of all a company's shares. This method applies to publicly traded companies and reflects what the market believes the business is worth.

Share price formula

Company value = Share prices x Number of shares

Enterprise value

Enterprise value provides a more complete picture than market cap alone by adjusting for debt and cash reserves. This method is common in acquisition contexts.

Enterprise value formula

Enterprise value = Market capitalisation + Total debt - Cash

This gives a more comprehensive valuation than market cap alone. Buyers often use enterprise value alongside the debt-to-equity (D/E) ratio to understand how much of the business is financed with debt.

Which valuation method should you use?

The right method depends on your business type, profitability, and reason for valuation. Many professional valuations use a combination of methods to arrive at a fair estimate.

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

• your business has significant physical assets
• you're winding down or selling assets separately
• the company isn't currently profitable

Use earnings or cash flow methods when:

• your business has consistent profits
• you're selling to a buyer who wants ongoing income
• you want to show the business's earning potential

Use market-based methods when:

• comparable businesses have recently sold
• you're a publicly traded company
• you want to benchmark against competitors

Most valuations combine multiple methods to reach a fair estimate. An accountant or business valuer can help you choose the right approach for your situation.

Factors that affect your company's value

Several factors can increase or decrease your company's valuation. Understanding these helps you improve your business's value over time and prepare for a future sale.

These factors can increase your company's value:

Factors that increase value:

• consistent revenue growth
• strong profit margins
• recurring or subscription-based revenue
• diverse customer base (low concentration risk)
• protected intellectual property or patents
• experienced management team
• strong market position or brand recognition

On the other hand, these factors can decrease value:

Factors that decrease value:

• declining revenue or profits
• heavy reliance on one or two customers
• owner-dependent operations
• outdated equipment or technology
• significant debt or liabilities
• pending legal issues

Getting help with your valuation

Selecting the right valuation method and finding accurate multipliers often requires professional expertise. Many practitioners follow formal standards, such as the Standards for Valuation Services from professional accounting bodies. A qualified accountant or business valuer can help you choose the approach that fits your situation.

You can handle some valuation tasks yourself:

What you can do yourself:

• calculate book value from your balance sheet
• track assets, liabilities, revenue, and cash flow
• prepare accurate financial records for any valuation

Valuation is subjective, especially in negotiations. Buyers may not pay what you believe your business is worth. However, knowing your value helps guide discussions and strengthens your position.

Accurate financial records are essential for any valuation method. Xero makes it easy to track your finances and generate reports on demand. Get one month free to see how it works, or find an accountant near you in our directory.

FAQs on company valuation

Common questions about valuing your business.

How accurate are DIY company valuations?

DIY valuations provide a useful starting point but may not reflect what a buyer would actually pay. Professional valuers, who are part of a global community with organisations operating in 137 countries, consider market conditions, industry trends, and intangible factors that formulas alone can't capture.

What if different methods give me different values?

Different methods often produce different results. This is normal. Most professional valuations use multiple methods and weigh the results based on your business type and the reason for valuation.

How often should I value my business?

Review your company's value annually or whenever significant changes occur, such as major growth, new contracts, or changes in market conditions.

Is my business actually worth what the valuation says?

A valuation estimates worth, but the actual sale price depends on what a buyer is willing to pay. Market conditions, negotiation skills, and buyer motivation all affect the final price.

Is a business worth 5 times profit?

Profit multiples vary by industry. Service businesses typically sell for 2–3x annual profit, while manufacturing companies may command 4–5x or higher due to tangible assets and established processes.