How To Value A Business: 6 Proven Valuation Methods

Published Friday 7 November 2025

Table of contents

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

Key takeaways

• Organize your financial records thoroughly before starting any valuation by gathering three to five years of profit and loss statements, balance sheets, and cash flow statements, plus creating a complete list of all assets and liabilities including intangible assets like brand reputation and intellectual property.

• Apply the earnings-based valuation method for service businesses by multiplying annual earnings by an industry multiplier (typically 2-3x for basic services, 4-6x for established businesses, and 7x+ for businesses with strong competitive advantages).

• Choose your valuation method based on your business type and purpose—use asset-based methods like book value for manufacturing or retail businesses with significant physical assets, and income-based methods for profitable service businesses.

• Recognize that professional valuators provide legally defensible assessments required for major transactions like selling your business, attracting investors, securing financing, or handling legal matters such as divorce or estate planning.

What is a business valuation?

Business valuation is the process of calculating your company’s monetary worth using proven financial methods. This calculation helps you set a realistic selling price, attract investors, and make strategic decisions about your business’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; for example, NZX listing rules require public companies to release audited financial statements within three months of their balance date.
• Plan for succession, including ownership transfers and buy-sell agreements for tax purposes
• Secure loans by providing lenders with collateral valuations

A business valuation provides a starting point for negotiations. The final selling price depends on factors like demand, competition, intangible assets, future prospects, and market conditions. Events such as trade wars or geopolitical tensions can also influence the price.

What to do before valuing your business

Before you value your business, make sure your financial records are organised and up to date. Taking these steps beforehand will make the valuation process smoother and more accurate.

• Pull together key financial statements like your profit and loss, balance sheet, and cash flow statements for the last three to five years, especially since some regulations require entities to file audited financial statements within four months of their balance date. With accounting software like Xero, these reports are ready when you are.
• Check that your financial records are accurate and up to date, including reconciling bank accounts and resolving outstanding invoices or unpaid bills
• List all your assets and liabilities, including intangible assets such as brand reputation, customer lists, and intellectual property
• Define why you are valuing your business, such as planning to sell, seeking investment, or preparing for the future, as this will help you and your advisor choose the best valuation method

6 methods to value your business

Six valuation methods give you different perspectives on your business value. Each method suits different business types and purposes:

• Asset-based methods such as book value and liquidation value work best for businesses with significant physical assets.
• Income-based methods such as earnings-based, times-revenue, and discounted cash flow suit profitable service businesses.
• Cost-based methods such as entry-cost help benchmark other valuations.

1. Book valuation

Book valuation calculates your business worth by subtracting total liabilities from total assets (value = assets – liabilities), though in a sale, tax law requires the buyer and seller to agree on the amount to allocate to each asset based on its market value. This method works well for asset-heavy businesses like manufacturing or retail.

What counts as assets

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

What counts as liabilities

• business loans
• credit lines
• taxes owed
• 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 shows what you’d receive if you closed your business today and sold everything.

This differs from book value because:

• Book value: Uses original purchase prices minus depreciation
• Liquidation value: Uses current market selling prices

Liquidation value is usually less than book value because you are selling quickly rather than at optimal market conditions.

3. Earnings-based valuation

Earnings-based valuation determines your business value 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 uses the formula: business value = revenue × multiplier.

5. Discounted cash flow valuation

The discounted cash flow method 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
• requires help from a professional valuator
• requires comprehensive records of capital expenditures and cash flows

Use the discounted cash flow method for businesses with significant equipment, property, or technology investments where maintenance costs vary from year to year.

6. Entry-cost valuation

The entry-cost method 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.

Consider the time and investment needed to build your business and develop goodwill with customers.

The entry-cost method can help you check another valuation method. For example, you might use the times-revenue method and get a value of $300,000, then use the entry-cost method and get $100,000. You may need to do further analysis to find the true value of your business.

Factors that affect business value

Professional valuators provide legally defensible assessments that banks, courts, and investors accept by adhering to established codes like the APES 225 Valuation Services standard.

Hire a professional when you need to:

• sell your business to get a credible negotiation starting point
• attract investors by determining accurate share prices and ownership stakes
• handle legal matters such as divorce, disputes, or estate planning
• secure financing by providing lenders with formal collateral valuations

Which valuation method should you use?

Choose a valuation method that matches your business type and your reason for valuing your business.

For asset-heavy businesses (manufacturing, retail): Use book or liquidation valuation since your value lies in physical assets.

For profitable service businesses: Use earnings-based valuation to reflect your income-generating ability.

For high-growth businesses: Use times-revenue or discounted cash flow to account for future potential.

• 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.

Identify your reason for valuing your business to help you choose the most suitable method.

3 business valuation approaches

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

• asset-based methods, such as book value (sum of assets minus liabilities) and liquidation value (what you would get if you sold everything today)
• income-based methods, such as earnings-based (annual profits × industry multiplier), times-revenue (annual sales × industry multiplier), and discounted cash flow (free cash flow × multiplier)
• cost-based method, such as entry-cost (what it would cost to build your business from scratch)

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

Make informed business decisions with Xero

Knowing your business’s value helps you make smart decisions for the future. When you plan for growth, consider a sale, or seek investment, 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 your financial health at a glance.

Try Xero for free to see how easy it is to manage your business finances.

FAQs on business valuation

Here are answers to some common questions about business valuation.

How do you calculate business valuation?

Calculate business valuation using this multiplier formula: business value = annual earnings × industry multiplier

Example calculation:

• Annual revenue: $500,000
• Industry multiplier: 2x
• Business value: $1,000,000

Your multiplier depends on:

• Industry type: Tech companies typically get higher multipliers than retail
• Profitability: Higher profit margins increase multipliers
• Growth potential: Expanding businesses command premium multipliers

Is a business worth 3 times profit?

A three times profit multiplier is a common starting point, but your actual multiplier varies significantly.

Higher multipliers (four to seven times or more):

• Established businesses with loyal customers
• Strong market position or competitive advantages
• Consistent growth and profitability

Lower multipliers (one to three times):

• Newer businesses without proven track records
• High-competition industries
• Businesses dependent on owner involvement

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, and in New Zealand, specific tax allocation rules apply when the purchase price is $1 million or more. The value depends heavily on its profitability, assets, and industry.

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

A business valuation is a calculated estimate of a business’s value based on various methods and financial data. Market value is the price a business actually sells for in the open market.

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