How to value a business: 6 methods, examples, tips

Published Friday 13 February 2026

Table of contents

• What is a business valuation?
• 6 methods to value your business
• Which valuation method should you use?
• Preparing your financial records for valuation
• When to hire a professional valuator
• Track your business value with Xero
• FAQs on business valuation

Key takeaways

• Choose your valuation method based on your business type and situation: use book or liquidation value for asset-heavy businesses like manufacturing, earnings-based valuation for profitable service businesses, and times-revenue or discounted cash flow for high-growth startups.
• Apply the earnings-based formula (value = earnings × multiplier) where multipliers typically range from 2-3 times for basic service businesses to 7+ times for businesses with strong competitive advantages like customer loyalty or intellectual property.
• Prepare accurate financial records including balance sheets, profit and loss statements, cash flow statements, and 3-5 years of tax returns to make your valuation faster and more reliable.
• Hire a professional chartered business valuator when selling your business, bringing on investors, going through legal processes, or applying for financing that requires a formal valuation.

Key takeaways

• Estimate your business's value using six main methods
• Choose a valuation method based on your 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. Knowing your business value helps you make informed decisions about selling, seeking investment, or planning for the future.

You might need a business valuation in several situations:

• sell your business and set a realistic asking price
• seek investment and demonstrate your company's worth to potential investors
• meet accounting and legal requirements for financial reporting
• plan for succession, including ownership transfers and buy-sell agreements
• secure loans by providing lenders with collateral valuations

A business valuation provides an estimate, not a final selling price. The actual price depends on what a buyer is willing to pay.

Factors that influence the final price include demand, competition, intangible assets, future prospects, and market conditions. External events like trade disruptions can also affect what buyers offer.

6 methods to value your business

Six proven methods can help you value your business. These methods fall into three main approaches: asset-based, income-based, and cost-based.

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.

To calculate book value, identify your assets and liabilities.

Assets include:

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

Liabilities include:

• 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 ($10M – $5M = $5M).

2. Liquidation value

Liquidation value estimates what you'd receive if you closed your business, sold all assets, and paid off all debts. Unlike book value, liquidation value reflects current market prices rather than original purchase prices minus depreciation.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier. The formula is: value = earnings × multiplier.

Typical multiplier ranges:

• Low (two–three times): basic service businesses with high competition
• Medium (four–six times): established businesses with steady customers
• High (seven times or more): businesses with strong competitive advantages

Several factors can increase your multiplier:

• Customer loyalty: Long-term, repeat customers are a valuable intangible asset. In one valuation example, valuators formally valued a company's customer base using inputs like a post-tax discount rate and a perpetuity growth rate.
• 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 for this calculation:

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

Example calculations:

• Two-times multiplier: $350,000 × 2 = $700,000 valuation
• Five-times multiplier: $350,000 × 5 = $1,750,000 valuation

4. Times-revenue valuation

Times-revenue valuation calculates your business worth using the formula: value = revenue × multiplier.

Valuators often use this method for businesses that aren't yet profitable or have inconsistent earnings. The multiplier varies by industry, growth rate, and market conditions.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow instead of profit or revenue. Free cash flow is the money left after you pay all operating expenses and invest in your business.

The formula is: value = free cash flow × multiplier.

Small businesses use this method less often because it:

• requires detailed financial analysis beyond basic profit and loss, often incorporating inputs like a risk-free interest rate and market risk premiums
• often needs help from a professional valuator
• needs comprehensive records of capital expenditures and cash flows

DCF works 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 a similar business from scratch. For instance, the replacement cost for a piece of equipment might be $1.2 million, but its actual fair value drops once you adjust for obsolescence. If you could create an equivalent business for $50,000, the existing business is likely worth around $50,000.

Consider the time and effort needed to build customer relationships and develop goodwill. These factors often make an established business worth more than the raw startup costs.

You can also use entry-cost valuation to sense-check other methods. For example, if a times-revenue calculation gives you $300,000 but entry-cost suggests $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, available data, and why you need the valuation. Using a combination of methods often gives the most realistic picture.

Match your business type to the right method:

• Asset-heavy businesses such as manufacturing and real estate: use book or liquidation valuation because physical assets drive the value
• 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

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

Preparing your financial records for valuation

Accurate financial records make valuations faster and more reliable. Before you start, gather the documents a valuator or buyer will need.

Gather these records:

• Balance sheet: shows your assets, liabilities, and book value
• Profit and loss statement: demonstrates your earnings history
• Cash flow statement: reveals how money moves through your business
• Tax returns: provides verified financial history (typically three–five years)
• Asset documentation: includes equipment lists, property deeds, and inventory records

If you use Xero, you can generate balance sheets, profit and loss reports, and cash flow statements instantly. Having real-time access to your financial data means you're always ready for a valuation conversation.

When to hire a professional valuator

A chartered business valuator (CBV) provides an objective, defensible assessment of your company's worth. Professional standards underscore the formal nature of their work, requiring them to retain the work papers for at least five years.

While you can estimate value yourself, certain situations call for professional help.

Consider hiring 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
• go through a legal process such as divorce, shareholder disputes, or estate planning
• apply for financing that requires a formal valuation

A professional gives you a clear, reliable valuation that holds up to scrutiny.

Track your business value with Xero

Understanding your business's value helps you make confident decisions about growing, selling, or investing. With real-time financial data and clear reports, you can track performance and stay ready for valuation conversations.

You get instant access to the balance sheets, profit and loss statements, and cash flow reports that valuators need. Get one month free and see how easy it is to manage your business finances.

FAQs on business valuation

Find answers to common questions about valuing a business.

How do you calculate business valuation?

The simplest way to calculate is to multiply your annual revenue or profit by an industry-standard multiplier. For example, a business with $500,000 in revenue and a two-times multiplier would be valued at $1 million.

The right method and multiplier depend on your industry, profitability, and growth potential.

Is a business worth 3 times profit?

Not always. A three-times profit multiplier is a common benchmark, but the right number varies by industry and business characteristics.

Stable, established businesses often command higher multipliers. Newer or riskier businesses typically receive lower ones. Factors like growth prospects and customer loyalty also affect the multiplier.

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

A business with $500,000 in sales could be worth anywhere from $250,000 to $1.5 million or more. The value depends on profitability, industry multipliers, and assets.

A profitable service business with loyal customers will be worth more than a low-margin retail business with the same revenue.

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

Business valuation uses financial data and valuation methods to calculate an estimate. Market value is the actual price a business sells for.

Valuing your business informs your asking price, but the final market value depends on what a buyer is willing to pay based on demand, how competitors perform, and how you negotiate.

How often should I value my business?

Review your business value annually or whenever significant changes occur. Major events that warrant revaluing your business include substantial revenue growth, acquiring assets, bringing on partners, or preparing to sell.

Regularly valuing your business helps you track progress and stay ready for opportunities.