How to value a company: six methods for small business
Discover practical ways to value a company, so you can set a price, attract investors, and plan with confidence.
Written by Jotika Teli—Certified Public Accountant with 24 years of experience. Read Jotika's full bio
Published Friday 13 February 2026
Table of contents
Key takeaways
- Choose the valuation method that matches your business type and purpose - use book value for asset-heavy businesses, earnings multiples for profitable companies, and revenue multiples for businesses with strong sales but inconsistent profits.
- Prepare your financial records thoroughly by gathering three years of profit and loss statements, balance sheets, and tax returns, while documenting key metrics like customer retention and revenue growth that demonstrate business health.
- Focus on building factors that increase your company's value, including consistent revenue growth, strong customer retention, efficient systems that don't rely solely on you, and clean organised financial records.
- Use multiple valuation methods and compare results to establish a reasonable value range, especially for important decisions like selling your business or seeking significant investment where professional valuation is recommended.
What is a company valuation?
A company valuation is an estimate of your business's monetary worth at a specific point in time. This number doesn't set or guarantee a sale price, but it gives you a foundation for financial reporting, seeking finance, and negotiating if you decide to sell.
For instance, a study of professional analysts found that when valuing equities, 92.8% use market multiples and 78.8% use a discounted cash flow approach.
Why you need a business valuation
Knowing your company's value helps you make better decisions, whether you're planning to sell, seeking investment, or measuring growth. Here are the main reasons small business owners get valuations:
- Preparing to sell: Establish a realistic asking price and strengthen your negotiating position
- Seeking financing: Show lenders or investors what your business is worth, which is especially relevant in a market where private equity buyers have record "dry powder" (nearly $4 trillion globally as of 2025) to invest.
- Planning succession: Prepare for retirement or ownership transitions, a key consideration in industries where, for example, many partners are looking to retire in the next 5–10 years.
- Buying out a partner: Determine fair value for ownership changes
- Estate planning: Understand tax implications and plan accordingly
- Measuring growth: Track your progress and identify opportunities to increase value
How to value a company
Here are six common methods for valuing a company:
The following sections explain each valuation method in detail.
Book value calculation
Book value measures what your business owns minus what it owes, based on your balance sheet. This method gives you a straightforward starting point for valuation using figures you already have.
Book value formula
Book value = Assets - Liabilities
Here's what counts as assets and liabilities:
Assets include:
- Property and equipment
- Inventory and cash reserves
- 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 estimates what you'd have left if you sold all assets at current market prices and repaid all debts. Unlike book value, this method reflects what buyers would actually pay today.
The distinction matters because market values fluctuate. Changes in demand, competition, technology, or market conditions can all affect what you'd receive when selling assets.
Liquidation valuation formula
Company value = Liquidation value of assets – Liabilities
Multiply company earnings
Earnings-based valuation calculates your company's worth as a multiple of its annual profits. This approach works well for businesses with consistent, documented profitability.
Earning-based calculation formula
Company value = Earnings x Multiplier
Use your annual net profit or EBITDA as the earnings figure.
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 business characteristics. For context, research shows that by the first half of 2024, the median mergers and acquisitions (M&A) deal across industries was around 9.5x EBITDA, though this figure can be skewed by larger transactions. Factors that can increase your multiplier include:
- loyal customer bases receive higher multipliers
- market exclusivity increases your multiple
- protected intellectual property adds value
- hard-to-replicate advantages boost your number
Many industries have standard multiplier ranges. A local accountant or business broker can tell you what's typical for your sector.
Multiply company revenue
Times-revenue valuation applies a multiplier to your annual sales rather than profits. This method suits businesses that have strong revenue but inconsistent or negative profitability. For example, after significant market corrections, the median valuation multiple for public software as a service (SaaS) companies stabilised around 6–7x revenue by early 2025.
Times-revenue formula
Company value = Annual revenue x Multiplier
Industry-specific multipliers vary widely. A local accountant or business broker can help you find the right range for your business type.
Multiply free cash flow
Free cash flow valuation measures the money left after covering operating costs and planned capital expenditure. This method, popular among professionals, shows whether your business can fund growth from its own cash generation. In fact, a study of analysts found that nearly 87% of those using discounted cash flow analysis use a discounted free cash flow model.
Free cash flow formula
Company value = Free cash flow x Multiplier
This approach works well for businesses that need upgrades like new equipment, a shop refit, or a digital makeover. It reveals whether you can fund improvements beyond your usual operating costs.
Calculating free cash flow requires detailed analysis of your capital expenditure needs.
Entry-cost analysis
Entry-cost analysis estimates what it would cost to recreate your business from scratch. A valuer calculates the capital expense of starting fresh, including adjustments for customer acquisition and brand building.
This method suits businesses that drive value primarily through physical assets. For example, a printing company's value might be closely tied to the cost of buying a printing press.
Entry-cost analysis doesn't work well for businesses with hard-to-replicate elements like key relationships, proprietary information, or established goodwill.
How to choose the right valuation method
The right valuation approach depends on your business type, financial situation, and why you need the valuation. Here's guidance on when to use each method:
Use book value or liquidation value when:
- your business is asset-heavy (manufacturing, real estate, equipment rental)
- you're in financial distress or considering closure
- you need a conservative baseline valuation
Use earnings or revenue multiples when:
- you have consistent profitability or sales history
- you're in an industry with established valuation benchmarks
- you're preparing to sell or seeking investors
Use free cash flow valuation when:
- your business requires significant capital investment
- you want to show value after necessary upgrades or improvements
- you're evaluating long-term business viability
Use entry-cost analysis when:
- your business value comes primarily from physical assets
- there's little proprietary intellectual property or goodwill
- buyers could easily replicate your business model
Factors that affect your company's value
Beyond the numbers, several factors can increase or decrease your business valuation. Understanding these helps you strengthen your company's worth before seeking a valuation.
Factors that increase value:
- consistent, documented revenue growth
- strong customer retention and recurring revenue
- efficient systems and processes that don't rely solely on you
- proprietary products, services, or intellectual property
- diversified customer base (not dependent on a few large clients)
- clean, organised financial records
Factors that decrease value:
- heavy reliance on the owner for daily operations
- declining sales or profit margins
- outdated equipment or technology
- concentration risk (too few customers or suppliers)
- poor financial record-keeping
- pending legal issues or compliance problems
How to prepare your business for valuation
Getting your financial house in order makes the valuation process smoother and may improve your final number. Follow these steps to prepare:
- Organise your financial records: Gather at least three years of profit and loss statements, balance sheets, and tax returns.
- Update your accounts: Reconcile bank accounts, update accounts receivable and payable, and verify asset values.
- Document key metrics: Track customer retention rates, revenue growth, profit margins, and other key performance indicators (KPIs) that demonstrate business health.
- Clean up your balance sheet: Address any unusual transactions, loans, or expenses that might confuse valuers.
- Identify value drivers: List unique assets like customer lists, proprietary processes, or intellectual property that add value beyond the numbers.
Accounting software makes this preparation easier. You can generate up-to-date financial reports instantly, track key metrics in real time, and export clean data for professional valuers.
Use Xero to support your business valuation
Valuing your company is straightforward when you have the right financial data at your fingertips. While professional valuers bring expertise to complex situations, organised and accurate financial records give you a strong starting point.
Cloud-based accounting software keeps your financial data current and accessible. Generate balance sheets, profit and loss statements, and cash flow reports instantly: all the information you need for any valuation method. Real-time insights into your business performance help you track the metrics that increase your company's value.
Whether you're planning to sell, seeking investment, or measuring your business growth, Xero gives you confidence in your numbers. Get one month free and see how easy business valuation preparation can be.
You can also find an accountant near you in our directory for professional valuation support.
FAQs on company valuation
Still have questions about valuing your business? Here are answers to common concerns small business owners have.
How do you estimate the value of a company?
Choose a valuation method that fits your business type and purpose. Asset-heavy businesses often use book value, while service businesses typically use earnings or revenue multiples. For important decisions like selling or seeking investment, consult a professional valuer.
Which valuation method is most accurate for small businesses?
No single method is universally 'most accurate'; the best approach depends on your specific situation. Many valuers use multiple methods and compare results to establish a reasonable value range.
Do I need a professional valuation or can I do it myself?
You can calculate rough valuations yourself using the methods in this guide for general planning. Seek professional valuation for important decisions like selling your business, legal disputes, or securing significant investment.
What factors increase my company's value?
Strong financial performance is the foundation, but recurring revenue, loyal customers, and systems that operate without heavy owner involvement all boost value. Clean financial records maintained in accounting software also make your business more attractive to buyers.
How often should I value my business?
You should value your business annually as part of your year-end financial review. More frequent valuations make sense if you're preparing to sell, experiencing rapid growth, or considering major business decisions.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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