How to value a business

Published Tuesday 6 October 2026

Table of contents

• What is a business valuation?
• 6 methods to value your business
• How to value a business step by step
• Which valuation method should you use?
• Factors that affect business value
• When to hire a professional business valuator
• Make informed business decisions with Xero
• FAQs on business valuation

Key takeaways

• Knowing how to value a business starts with picking methods that suit your business type, then cross-checking the results
• Earnings-based valuation multiplies seller’s discretionary earnings (SDE) by an industry multiple, and it suits most profitable small businesses
• Discounted cash flow (DCF) valuation discounts each year of projected free cash flow, then adds a terminal value
• Loyal customers and owner-independent systems lift your value, and a professional business valuator helps with sales, investment and legal matters

What is a business valuation?

A business valuation is an estimate of what your company is worth in pesos. Knowing that figure helps you price a sale, talk to investors and plan what happens next.

A valuation usually comes up around a big decision. You might need one when you’re:

• selling the business or planning your exit strategy
• raising money from investors and agreeing how much equity to offer
• applying for a loan that needs collateral or a formal valuation
• planning succession or setting up a buy-sell agreement with partners
• meeting accounting or financial reporting requirements

A valuation and market value measure different things. Your valuation is a calculated estimate based on your financial data and chosen method. Market value is the price a buyer actually pays.

The two are linked, since your valuation sets the starting point for negotiations. The US Internal Revenue Service (IRS) can treat a later sale of the business’s shares as relevant evidence when it reviews a valuation. Market demand, competition, growth prospects and the wider economy all shape the final price.

6 methods to value your business

Each of these six methods suits a different kind of business, so it helps to know them all before you pick one. For each method, you’ll find when it fits, how to work it out, its pros and cons, and one mistake to avoid.

1. Book valuation

Book valuation works out your business’s worth with a simple formula: value = assets − liabilities. It treats your business as everything it owns minus everything it owes.

Book value and market value often differ. Book value uses the figures recorded on your balance sheet, where depreciation lowers asset values each year. Market value is what those assets would sell for today, which could be higher or lower.

This method fits asset-heavy businesses, such as manufacturers, property holders and distributors with large inventories. It’s also useful when profits are low or uneven and assets hold most of the value.

You can work out your book value in four steps:

1. Pull your latest balance sheet.
2. Add up total assets, including cash, receivables, inventory, equipment, vehicles, property and intellectual property.
3. Add up total liabilities, including loans, credit lines, taxes owed and unpaid bills.
4. Subtract total liabilities from total assets.

For example, if your business has ₱10 million in assets and ₱5 million in liabilities, your book value is ₱5 million.

Book valuation is quick but narrow. The first two points below are its strengths, and the last two are its limits.

• Uses figures you already have in your accounts
• Gives an objective number that’s hard to dispute
• Leaves out future earnings, goodwill and customer relationships
• Misstates assets whose recorded value has drifted from their resale price

Watch out for treating book value as market value. A delivery van bought for ₱1.5 million might show ₱600,000 on your books after depreciation but still sell for ₱900,000.

2. Liquidation value

Liquidation value estimates what you’d walk away with if you closed the business, sold every asset and paid off every debt. Unlike book value, it uses current resale prices instead of purchase prices minus depreciation.

How fast you sell changes the result. An orderly liquidation gives you months to find the right buyers, so assets fetch closer to fair prices. A forced liquidation happens quickly, often under pressure from lenders, so buyers know they can bargain hard.

Think of it like a shop’s closing-down sale: the shorter the deadline, the deeper the discounts. This method fits owners weighing closure, lenders checking collateral and anyone who wants a conservative floor value.

You can work out liquidation value in four steps:

1. List every asset, including equipment, inventory, receivables and property.
2. Estimate what each asset would sell for within your timeframe, whether orderly or forced.
3. Subtract all liabilities.
4. Subtract closure costs, such as broker fees, final wages and lease exit costs.

Say your assets could sell for ₱4.5 million in an orderly sale or ₱3 million in a forced sale. With ₱2 million in liabilities and ₱500,000 in closure costs, your liquidation value is ₱2 million orderly or ₱500,000 forced.

Liquidation value is the most cautious figure you can calculate. Here’s where it helps and where it falls short, with strengths listed first.

• Sets a realistic minimum for negotiations
• Reflects what assets would actually fetch today
• Ignores the value of the business as a going concern
• Relies on resale estimates that can be hard to pin down

A common mistake is forgetting closure costs. Final wages, fees and lease penalties can take a large bite out of what you keep.

3. Earnings-based valuation

Earnings-based valuation multiplies your annual earnings by an industry multiple: value = earnings × multiple. It’s one of the most common ways to value a small business.

This method fits profitable businesses with steady earnings, such as established service firms, retailers and restaurants. Before you use it, review your profitability measures to confirm your earnings hold up year to year.

You can plug three kinds of earnings into the formula. Each gives a different result, so match your earnings figure to the multiple you’re using.

• Net profit is your bottom line after all expenses, including tax and interest
• Earnings before interest, taxes, depreciation and amortisation (EBITDA) shows operating performance before financing and accounting choices
• Seller’s discretionary earnings (SDE) is pre-tax earnings with the owner’s pay and other non-essential costs added back

SDE is the figure behind BizBuySell’s multiples. To calculate it, you normalise your earnings by adding back costs a new owner wouldn’t carry, such as:

• your own salary and benefits as the owner
• one-off costs, like a legal settlement or office move
• personal expenses paid through the business, such as a family car
• interest and non-cash costs like depreciation and amortisation

BizBuySell’s US valuation multiples data shows average earnings multiples of 2 to 3.3 across popular sectors, with an all-sector average of 2.58. The data covers US business sales from the third quarter of 2021 to the second quarter of 2026.

Treat these US figures as a rough guide, since multiples in the Philippine market may differ. Your multiple rises with loyal repeat customers, local market strength, intellectual property and a business model that’s hard to copy.

You can work out an earnings-based value in four steps:

1. Start with net profit from your profit and loss statement.
2. Add back the adjustments above to get your SDE.
3. Choose a multiple that reflects your industry, size and risk.
4. Multiply your SDE by that multiple.

For example, a business with ₱4 million in SDE is worth ₱10 million at a multiple of 2.5. At 3.3, the value rises to ₱13.2 million.

Earnings-based valuation ties price to profit, which is what a buyer is paying for. It still has trade-offs, listed here with strengths first.

• Links value directly to the profit a buyer would take home
• Uses multiples you can compare against published sales data
• Depends heavily on picking the right multiple
• Rewards recent profit, even if it came from one unusually good year

Watch out for mixing earnings types. Applying an SDE-based multiple to net profit usually undervalues your business, since net profit keeps the costs that SDE adds back.

4. Times-revenue valuation

Times-revenue valuation multiplies your annual revenue by an industry multiple: value = revenue × multiple. It’s a quick option when profit doesn’t tell the full story.

This method fits businesses that aren’t yet profitable, have uneven profits or are growing fast, such as subscription services and young tech firms. BizBuySell’s US data puts revenue multiples between 0.42 and 1.2, with an all-business average of 0.67.

You can work out a times-revenue value in four steps:

1. Take your total annual revenue from your profit and loss statement.
2. Find a revenue multiple for your industry.
3. Adjust the multiple for growth, margins and customer retention.
4. Multiply your revenue by the adjusted multiple.

For example, a business with ₱20 million in annual sales and a multiple of 0.67 is worth ₱13.4 million. That figure holds only if the business turns those sales into healthy profit.

Revenue ignores costs, so two businesses with the same sales can be worth very different amounts. A café earning ₱4 million profit on ₱20 million in sales is a stronger buy than one clearing ₱500,000 on the same sales.

Times-revenue is simple to run, though it gives only a partial view. Its strengths come first below, followed by its limits.

• Works even when your business isn’t profitable yet
• Uses one figure that’s easy to verify
• Ignores costs, margins and debt
• Overvalues businesses with high sales and thin profits

Be careful with multiples borrowed from other industries. A software firm’s revenue multiple applied to a trading business can overstate what it’s worth.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow instead of profit or revenue. Free cash flow is the cash left after paying operating expenses and reinvesting in equipment, upgrades and maintenance.

DCF rests on a simple idea: ₱1 you receive in five years is worth less than ₱1 in your hand today. It projects your future free cash flow, then discounts each year back to today’s value using a rate that reflects risk.

This method fits businesses with predictable cash flows, as well as those with large investments in equipment, property or technology. A detailed cash flow forecast gives you the projections it needs.

DCF takes more work than the other methods. Follow these five steps:

1. Project free cash flow for each year, usually over five to 10 years.
2. Choose a discount rate that reflects the risk of your business, using a higher rate for riskier businesses.
3. Discount each year’s cash flow by dividing it by (1 + discount rate), raised to the power of the year number.
4. Work out a terminal value for the years beyond your projection: final-year cash flow × (1 + growth rate) ÷ (discount rate − growth rate).
5. Discount the terminal value to today, then add it to the discounted cash flows.

Here’s a simple example using three years to keep the numbers manageable. Say you project free cash flow of ₱1,000,000, ₱1,100,000 and ₱1,200,000, and use a 20% discount rate. Discounting each year gives you:

• ₱1,000,000 ÷ 1.2 = ₱833,333 for the first year
• ₱1,100,000 ÷ 1.44 = ₱763,889 for the second year
• ₱1,200,000 ÷ 1.728 = ₱694,444 for the third year

Next, assume cash flow grows 5% a year after that. The terminal value is ₱1,200,000 × 1.05 ÷ (0.20 − 0.05) = ₱8,400,000, which discounts to ₱8,400,000 ÷ 1.728 = ₱4,861,111.

Add everything together: ₱833,333 + ₱763,889 + ₱694,444 + ₱4,861,111 = ₱7,152,777. On a DCF basis, the business is worth about ₱7.15 million.

DCF gives the most detailed view of future value, but it asks a lot of your records. The first two points below are strengths, and the last two are drawbacks.

• Values the business on the cash it will generate in future
• Accounts for risk through the discount rate
• Needs detailed records of cash flow and capital spending
• Often calls for help from a professional valuator

Watch out for small changes in your assumptions. In the example, the terminal value makes up about 68% of the total. A slightly different growth or discount rate shifts the result a lot.

6. Entry-cost valuation

Entry-cost valuation estimates what it would cost to build an equivalent business from scratch. If you could replicate your business for ₱3 million, a buyer will likely see it as worth around ₱3 million.

This method fits businesses with simple setups that are easy to copy, such as a small café or a cleaning service. It also works well as a cross-check against your other results.

You can work out an entry-cost value in four steps:

1. List the startup costs you’d face, such as equipment, inventory, licences and fit-out.
2. Estimate the time and money needed to build operations to your current level.
3. Add the cost of winning your current customer base and reputation.
4. Total these costs to get your entry-cost value.

Entry-cost valuation leaves out what an existing business already has: current profit, an established brand and trained staff. That gap is what makes it useful as a cross-check.

Say your earnings-based value is ₱9 million and your entry cost is ₱3 million. The ₱6 million difference is what a buyer pays for profit, brand and staff. Be ready to show those are real and lasting before you ask for that premium.

Entry-cost valuation is a handy reality check with a few weak spots. Its strengths come first below.

• Gives buyers a clear build-or-buy comparison
• Uses costs you can research and quote
• Relies on time and effort estimates that are hard to price
• Suits simple businesses better than specialised ones

One mistake to avoid is leaving out the owner’s time. Months of unpaid effort to find customers and train staff are part of the real entry cost.

How to value a business step by step

Here’s how to value a business using the earnings-based method, then check the result with a second method. The example is a consulting firm with ₱10 million in annual revenue and ₱2.2 million in net profit.

1. Gather your financial data

Start with accurate, up-to-date financial statements, since every method relies on them. Collect these documents before you begin:

• a balance sheet showing assets and liabilities
• profit and loss statements for the last three to five years
• income tax returns filed with the Bureau of Internal Revenue (BIR)
• aged receivables and payables reports
• a list of equipment and inventory with current values

Organised records make the valuation faster and more accurate. For the consulting firm, the profit and loss statement shows ₱10 million in revenue and ₱2.2 million in net profit.

2. Normalise your earnings

Next, add back costs a new owner wouldn’t carry to reach your SDE. The firm adds back ₱600,000 of owner’s salary, a one-off ₱150,000 office move and ₱50,000 of personal car costs, giving SDE of ₱3 million.

3. Choose your multiple

Pick a multiple that fits your industry and risk. BizBuySell’s US sector averages run from 2 to 3.3, so a multiple of 3 suits an established firm with repeat clients.

4. Apply the formula

Multiply your SDE by the multiple. For the consulting firm, ₱3 million × 3 = ₱9 million.

5. Check your result with another method

Test the figure with a second method. Times-revenue with a multiple of 1, within BizBuySell’s US range of 0.42 to 1.2, gives ₱10 million × 1 = ₱10 million.

These results suggest a value of about ₱9 million to ₱10 million. Customer concentration and how much the business depends on you will help settle the final figure.

Which valuation method should you use?

The right method depends on your business type, the data you have and why you need the valuation. Using more than one method usually gives you the most realistic picture.

Use these starting points to narrow your choice:

• Start with book or liquidation value if you run an asset-heavy business, such as manufacturing or property
• Use earnings-based valuation if you run a service business with steady profits
• Try times-revenue if you’re growing fast but aren’t yet profitable
• Choose DCF if your cash flows are predictable and you can project them with confidence
• Add entry-cost as a cross-check for businesses that are simple to set up

Your reason for valuing matters too. A sale or investment round needs more precision than internal planning, so match your effort to the stakes.

Factors that affect business value

Beyond your financial statements, qualitative factors can move your value up or down. Buyers and investors weigh these to decide whether your business is a sound investment.

These factors raise your value:

• Long-term contracts, recurring revenue and low customer churn
• Strong brand recognition or a leading local position
• Consistent income with predictable growth
• Documented systems that run without the owner
• Patents, trademarks or proprietary processes
• Room to grow into new markets or products

Other factors make buyers cautious and push the price down. These factors lower your value:

• Heavy reliance on the owner’s skills or relationships
• A large share of revenue from one client
• A shrinking market or rising competition
• Ageing equipment that needs major investment
• Pending lawsuits, regulatory issues or compliance gaps

When to hire a professional business valuator

The methods above give you a solid estimate, but some situations call for an objective, defensible figure. A professional business valuator provides that, often following valuation standards such as those set by the American Institute of Certified Public Accountants.

Consider hiring one when you:

• sell your business and need a credible starting point for negotiations
• bring on investors or partners and need to set share prices
• go through a legal process, such as a partner dispute or estate planning
• apply for financing that requires a formal valuation
• run a complex structure with multiple entities or unusual assets

A professional valuation is an upfront cost that can protect you from expensive mistakes in high-stakes deals.

Make informed business decisions with Xero

Every valuation method in this guide depends on reliable numbers from your balance sheet, profit and loss statement and cash flow records. The better prepared your records are, the stronger your position with buyers, lenders and investors.

Xero keeps those reports up to date with automated bank feeds, real-time reporting and cash flow forecasts, so you’re ready when valuation questions come up. Explore the plans and get one month free to see how simple managing your finances can be.

FAQs on business valuation

Here are quick answers to common questions about valuing a small business.

What is the easiest way to value a small business?

Multiply your SDE by a multiple for your industry, which takes minutes once your books are up to date. Then compare the result with your book value to see how much of the price rests on goodwill.

Is a business worth 3 times profit?

It can be: 3 sits near the top of BizBuySell’s US sector averages, so it suits an established business with loyal customers. Owner-dependent or riskier businesses usually sell for a lower multiple.

How much is a business worth with ₱25 million in sales?

At BizBuySell’s US all-business average revenue multiple of 0.67, ₱25 million in sales points to roughly ₱16.75 million, though profit can change that a lot. For context, the median sale price in the same US data is $340,000.

What’s the difference between SDE and EBITDA?

SDE adds back the full pay of one owner, while EBITDA deducts a market-rate salary for whoever runs the business. That’s why SDE usually suits owner-operated small businesses and EBITDA suits larger firms with a management team.

Does goodwill count in a business valuation?

Yes, goodwill such as your reputation and customer relationships is built into earnings and revenue multiples. Book value usually leaves it out, because goodwill you’ve built yourself doesn’t appear on your balance sheet.

How often should you value your business?

A yearly check helps you track progress and spot what’s driving your value. Get a fresh valuation before any big event, such as a sale, new investor or partner buyout.