How to value a business: 6 proven valuation methods

Published Monday 11 May 2026

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

• Gather three to five years of financial statements and list all assets and liabilities, including intangible ones like brand reputation and intellectual property, before you start any valuation.
• Match your valuation method to your business type: use asset-based methods like book value for manufacturing or retail businesses, and earnings-based methods for profitable service businesses.
• Apply an industry multiplier of 2–7x (or higher) to your annual earnings when valuing a service business, with stronger multipliers going to businesses that have loyal customers, a dominant market position, or hard-to-replicate systems.
• Hire a professional valuator for major transactions like selling your business, seeking investment, or handling legal matters, as professional valuations typically cost $5,000–$20,000 and take two to four weeks.

What is a business valuation?

Business valuation is the process of calculating your company's monetary worth using proven financial methods that align with the latest International Valuation Standards. 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:

• set a realistic asking price when selling your business
• 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
• secure loans by providing lenders with collateral valuations

A business valuation provides a starting point for negotiations, not a fixed price. The final selling price depends on factors like market demand, competition, intangible assets, and future growth prospects.

What to do before valuing your business

Before you value your business, make sure your financial records are organised and up to date. This makes the valuation process smoother and more accurate.

• gather financial statements: pull together your profit and loss, balance sheet, and cash flow statements for the last three to five years
• verify accuracy: reconcile bank accounts and resolve outstanding invoices or unpaid bills
• list assets and liabilities: include intangible assets such as brand reputation, customer lists, and intellectual property
• define your purpose: clarify why you're valuing your business, whether to sell, seek investment, or plan for succession

You can access these reports instantly with accounting software like Xero.

6 methods to value your business

There are six main methods to value a business, grouped into three categories:

• asset-based methods: book value and liquidation value work best for businesses with significant physical assets
• income-based methods: earnings-based, times-revenue, and discounted cash flow suit profitable service businesses
• cost-based methods: entry-cost helps benchmark other valuations

1. Book valuation

Book valuation calculates your business worth by subtracting total liabilities from total assets.

Formula: Value = assets – liabilities

This method works well for asset-heavy businesses like manufacturing or retail. In a sale involving two or more assets, tax law requires buyer and seller to agree on how much value to allocate to each asset based on market value.

What counts as assets:

Your assets include everything your business owns that has value:

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

What counts as liabilities:

Your liabilities include everything your business owes:

• business loans
• credit lines
• taxes owed
• accounts payable (unpaid bills)

Example: 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:

• book value: uses original purchase prices minus depreciation
• liquidation value: uses current market selling prices

Liquidation value is usually lower because quick sales rarely achieve optimal prices.

3. Earnings-based valuation

Earnings-based valuation determines your business value by multiplying annual earnings by an industry multiplier.

Formula: Value = earnings × multiplier

Multiplier ranges vary by business type and market position:

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

Factors that increase your multiplier:

• customer loyalty: long-term, repeat customers
• 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:

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

Example: If your business earns $350,000 annually:

• with a 2x multiplier, the value is $700,000
• with a 5x multiplier, the value is $1,750,000

4. Times-revenue valuation

Times-revenue valuation calculates your business value based on annual sales rather than profit.

Formula: Value = revenue × multiplier

This method suits high-growth businesses or those not yet profitable.

5. Discounted cash flow valuation

Discounted cash flow (DCF) 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.

Formula: Value = free cash flow × multiplier

This method is less common for small businesses because it:

• requires detailed financial analysis beyond basic profit and loss
• requires help from a professional valuator who specialises in valuation-related disciplines
• requires comprehensive records of capital expenditures and cash flows

Use DCF for businesses with significant equipment, property, or technology investments.

6. Entry-cost valuation

Entry-cost valuation asks what it would cost to start a business like yours from scratch. If you could build an equivalent business for $50,000, then your existing business is probably worth at least $50,000.

This method works well as a sanity check. For example, if times-revenue suggests a $2 million valuation but entry-cost shows you could replicate the business for $100,000, you might need to reconsider your assumptions.

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.

Get one month free to see how easy it is to manage your business finances.

FAQs on business valuation

Here are answers to common questions about valuing your business.

How long does a business valuation take?

A basic valuation using the methods outlined above can take a few hours if your financial records are organised. Professional valuations typically take two to four weeks, depending on the complexity of your business and the level of detail required.

How much does a professional business valuation cost?

Professional business valuations typically cost between $5,000 and $20,000 for small to medium businesses. The cost depends on your business size, industry complexity, and the valuation method used. Some accountants include basic valuations as part of their advisory services.

How often should you value your business?

You should update your business valuation annually if you're actively seeking buyers or investors. For general planning purposes, a valuation every three to five years is sufficient. Update your valuation sooner if you've made significant changes to your business operations, assets, or market position.

Which valuation method is most accurate?

No single method is universally most accurate. The best approach is to use multiple methods and compare the results. Asset-based methods work best for asset-heavy businesses, while earnings-based methods suit service businesses. Professional valuators often use a combination of methods to arrive at a fair market value.