How to value a business

Published Thursday 4 September 2025

Table of contents

• What is a business valuation?
• 6 methods to value your business
• Which valuation method should you use?
• Factors that affect business value
• 3 business valuation approaches
• Make informed business decisions with Xero
• FAQs on business valuation

Key takeaways

• You can estimate your business’s value using six main methods
• Choose your valuation method based on your business type, available data, and your goals
• Many factors beyond calculations affect business value, such as customer loyalty and market conditions
• Consider hiring a professional valuator for complex or high-stakes situations
• Choose your valuation method based on business type, available data, and the purpose of the valuation.
• Multiple factors beyond calculations affect business value, including customer loyalty, competitive advantages, and market conditions.
• Professional valuators are recommended 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.

Common reasons you might need a business valuation:

• Sell your business and set a realistic asking price
• Seek investment and show 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 for tax purposes
• Secure loans by providing lenders with collateral valuations

A business valuation does not establish a selling price. It may play a role in negotiations, but the final selling price depends on many factors, such as demand, competition, intangible assets, future prospects, and market conditions. Events like trade wars or geopolitical tensions can also affect the price.

6 methods to value your business

Here are 6 proven methods to value your business

1. Book valuation

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

What counts as assets

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

What counts as liabilities

• 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

The liquidation value is similar to the book value. It calculates what the owner would be left with if they closed the business, sold the assets and paid all the debts.

The book value is the purchase price minus depreciation, which may not reflect the current market value.

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.

Multiplier ranges:

• low (2–3x): basic service businesses, high competition
• medium (4–6x): established businesses with steady customers
• high (7x+): businesses with strong competitive advantages

Factors that increase multipliers:

• Customer loyalty: Long-term, repeat customers
• Market position: Local exclusivity or dominant market share
• Intellectual property: Patents, trademarks, proprietary processes
• Business model: Hard-to-replicate operations or systems

Earnings options:

• net profit: bottom-line earnings after all expenses
• earnings before interest, taxes, depreciation, and amortisation (EBITDA), which is typically higher than net profit

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

The times-revenue valuation follows the formula: value = revenue × multiplier.

5. Discounted cash flow valuation

Discounted cash flow 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, such as equipment upgrades or maintenance.

Formula: value = free cash flow × multiplier

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

6. Entry-cost valuation

An entry-cost valuation asks what it would cost to start a business like the one being valued. If you could build an equivalent business for $50,000, then the existing business is probably worth $50,000 too.

You should also consider the time and investment needed to build your business and develop goodwill with customers.

The entry-cost business valuation may sometimes be used to sense-check another form of valuation. You might try the times-revenue method and get a value of $300,000, then use the entry-cost valuation and get $100,000. You may need to do further analysis to find the true value of your business.

Which valuation method should you use?

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

• Asset-heavy businesses, like manufacturing or real estate, might lean towards a book or liquidation valuation because their value is tied up in physical assets.
• Service-based businesses with strong, consistent profits might use an earnings-based valuation to reflect their ability to generate income.
• High-growth startups or tech companies often use a times-revenue or discounted cash flow method to account for future potential, even if they aren't profitable yet.

Decide why you need a valuation. This will help you choose the most suitable method.

Factors that affect business value

A chartered business valuator (CBV) can provide an objective and defensible assessment of your company's worth.

Hire a professional if you are:

• sell your business and need a credible starting point for negotiations
• bring on investors or partners and need to determine share prices and ownership stakes
• go through a legal process, such as divorce, shareholder disputes, or estate planning, where specific rules apply
• apply for certain types of financing that require a formal valuation

A professional can give you a clear, reliable valuation.

3 business valuation approaches

Business valuations provide estimates. Many factors affect what buyers will pay, including market conditions, competition, and timing. There are 3 main valuation approaches:

Asset-based methods:

• Book value: Sum of assets minus liabilities
• Liquidation value: What you'd get if you sold everything today

Income-based methods:

• Earnings-based:EAnnual profits × industry multiplier
• Times-revenue: Annual sales × industry multiplier
• Discounted cash flow: Free cash flow × multiplier

Cost-based method:

• Entry-cost: What it would cost to build your business from scratch

Getting your financial data:

Your balance sheet shows your book value and is essential for most valuation methods. If you use Xero cloud accounting software, you can generate balance sheets instantly instead of waiting for year-end reports from your accountant.

Using valuations effectively:

Use these calculations to set realistic expectations and negotiate with buyers, investors, or lenders. Find more tips in the guide to succession planning.

Make informed business decisions with Xero

Understanding your business's value is key to making smart decisions for its future. Whether you're planning for growth, considering a sale, or seeking investment, having a clear view of your finances puts you in control. With real-time data and easy-to-read reports, you can track your performance, manage cash flow, and see the full picture of your financial health.

Start your free trial of Xero cloud accounting software and see how easy it is to manage your business.

FAQs on business valuation

Here are answers to some common questions about business valuation.

How do you calculate business valuation?

A simple way is to use a multiplier. For example, you could multiply your annual revenue or profit by an industry-standard number. A business with $500,000 in annual revenue and a multiplier of 2 would be valued at $1 million.

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

Is a business worth 3 times profit?

Sometimes, but it's not a universal rule. A multiplier of 3 times profit (or earnings) is a common benchmark, but the right number varies widely.

Stable, established businesses might command a higher multiplier, while newer or riskier ones might get a lower one. It depends on factors like your industry, growth prospects, and customer loyalty.

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

A business with $1 million in sales could be worth anywhere from $500,000 to several million dollars. The value depends heavily on its profitability, assets, and industry.

A highly profitable tech company with $1 million in sales will be worth far more than a low-margin retail business with the same sales figure.

What's the difference between business valuation and market

A business valuation is a calculated estimate of a company's worth based on various methods and financial data. Market value, on the other hand, is the price a business actually sells for in the open market.

While a valuation informs the price, the final market value is determined by what a buyer is willing to pay.