How to value a company: methods, formulas and tips

Published Wednesday 25 February 2026

Table of contents

• What is a company valuation?
• Why you need to value your business
• When to value your business
• Company valuation methods
• Choosing the right valuation method
• Factors that affect your company's value
• When to get professional help
• Use Xero to keep your financial records valuation-ready
• FAQs on valuing a company

Key takeaways

• Choose the right valuation method based on your business type and purpose: use asset-based methods for manufacturing or property businesses, earnings-based for established companies with consistent profits, revenue-based for high-growth businesses without steady profits, and discounted cash flow for businesses with predictable cash flows.
• Apply multiple valuation methods and compare results to get a realistic range rather than relying on a single calculation, as this approach provides better insight for negotiations and decision-making.
• Focus on factors that genuinely increase your business value, such as building customer loyalty, diversifying revenue streams, maintaining clean financial records, and reducing owner dependency to make your company more attractive to buyers or investors.
• Maintain accurate, organised financial records using accounting software to ensure you have reliable balance sheets, profit and loss statements, and cash flow reports ready for any valuation process.

What is a company valuation?

A company valuation estimates what your business is worth in monetary terms. It doesn't set or guarantee a sale price, but gives you a useful reference point. For instance, the digital banking platform Chime went public at a valuation 62% below its peak private-market value. This shows that market conditions can significantly alter final pricing.

You can use a company valuation for:

• financial reporting and tax purposes
• seeking finance or investment
• negotiating a sale price
• planning for growth or exit

Why you need to value your business

Knowing what your business is worth helps you make better decisions at every stage of growth. A valuation gives you a clear picture of where you stand financially and where you're headed.

Common reasons to value your business include:

• Selling or exiting: Set realistic expectations and negotiate from a position of knowledge
• Seeking investment: Show potential investors what they're buying into
• Applying for finance: Demonstrate your business's worth to lenders
• Bringing in partners: Establish fair ownership stakes
• Planning for the future: Track growth and set meaningful goals
• Resolving disputes: Provide an objective basis for buyouts or legal matters

Even if you're not planning a sale, regular valuations help you understand what's driving value in your business and where to focus your efforts.

When to value your business

Certain events and milestones signal that it's time to assess what your business is worth.

Value your business when you're:

• considering selling all or part of the business
• seeking investment or applying for a loan
• bringing in a new partner or shareholder
• planning your exit strategy
• going through a divorce or estate planning
• buying out a co-owner
• reviewing your business insurance coverage

Regular valuations also help if you:

• want to track business growth year over year
• need to set performance targets for yourself or your team
• are benchmarking against competitors in your industry

Many business owners review their valuation annually as part of their financial planning, even without a specific trigger event.

Company valuation methods

There's no single correct way to value a business. The right method depends on your business type, industry, and why you need the valuation.

• Asset-based methods (book value, liquidation value) work best for businesses where physical assets make up most of the value, like manufacturing or property. For example, a manufacturing firm might use an asset-based analysis for its plants and equipment. It could combine this with other methods for a comprehensive valuation.
• Income-based methods (earnings multiple, revenue multiple, discounted cash flow) suit businesses with consistent financial performance or strong growth potential.
• Cost-based methods (entry-cost analysis) apply to businesses that could be replicated by purchasing similar assets and building a customer base.

Most professional valuations use multiple methods and compare results to arrive at a reasonable range. Below, we explain each method and when to use it.

Book value calculation

Book value measures what your business owns minus what it owes, based on your balance sheet. This method works best for asset-heavy businesses like manufacturing or property, where physical assets make up most of the value.

Book value formula

Book value formula:Assets − Liabilities = Book value

This gives you the net value of everything your business owns after subtracting debts.

Assets include:

• property and equipment
• inventory
• cash reserves
• accounts receivable
• intellectual property like patents

Liabilities include:

• loans and credit lines
• unpaid taxes
• accounts payable (bills you owe)

Example: A business with $10m in assets and $5m in debts has a book value of $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, it reflects what buyers would actually pay today rather than what's recorded on your balance sheet.

Market value can fluctuate based on:

• changes in demand for your assets
• increased competition
• obsolete technology
• broader market disruption

This method suits businesses considering closure or those with assets that may have appreciated or depreciated significantly.

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

Earnings-based valuation

Earnings-based valuation calculates your company's worth by multiplying annual profit by an industry-specific number called a multiplier. This method works well for established businesses with consistent profits.

Earnings-based calculation formula

Company value = Earnings x Multiplier

Two variables determine your valuation:

Earnings figure: Use either net profit or earnings before interest, taxes, depreciation, and amortisation (EBITDA). It's considered one of the major cash flow concepts for valuation. It shows operating performance without accounting for financing or tax decisions.

Multiplier: Typically ranges from 2x to 10x or higher. Your multiplier depends on:

• customer loyalty and retention
• market exclusivity or competitive moat
• protected intellectual property
• growth trajectory
• industry norms

A local accountant or business broker can help you find the right multiplier for your industry.

Revenue-based valuation

Revenue-based valuation (also called times-revenue) multiplies your annual sales by an industry multiplier. This method suits early-stage or high-growth businesses that have strong revenue but haven't yet turned a consistent profit. For example, a software as a service (SaaS) business with high recurring revenue may be valued primarily on a revenue multiple. This best reflects market expectations for growth.

Times-revenue formula

Company value = Annual revenue x Multiplier

As with the earnings-based calculation, the multiplier plays a big role in your final valuation. There are often accepted industry-specific multipliers. A local accountant or business broker will know the multiplier range for your type of business.

Discounted cash flow valuation

Discounted cash flow (DCF) valuation estimates your company's worth based on its projected free cash flow (the money left after covering operating costs and planned capital spending) over a defined period, typically five to ten years.

This method helps assess whether a business can fund future investments like new equipment, renovations, or technology upgrades. It's particularly useful for businesses with predictable cash flows or those planning significant capital expenditure.

Calculating free cash flow requires detailed analysis of future expenses, so many business owners work with an accountant for this method.

Free cash flow formula

Company value = Free cash flow x Multiplier

Entry-cost analysis

Entry-cost analysis values a company by estimating what it would cost to build the same business from scratch. This includes equipment, customer acquisition, and brand development.

This method works best for asset-driven businesses that could be replicated by purchasing similar equipment. For example, a printing company's value might closely match the cost of buying equivalent presses and building a customer base.

Entry-cost analysis isn't suitable for businesses with hard-to-replicate advantages like:

• key customer relationships
• proprietary technology or processes
• strong brand recognition
• specialised expertise

Choosing the right valuation method

The best valuation method depends on your business stage, industry, and purpose. Here's a quick guide.

Use book value or liquidation value if:

• your business owns significant physical assets
• you're in manufacturing, property, or equipment-heavy industries
• you need a conservative baseline for negotiations

Use earnings-based valuation if:

• your business has consistent, stable profits
• you're an established company with several years of financial history
• buyers or investors want to see return on investment

Use revenue-based valuation if:

• your business is early-stage or high-growth
• you have strong sales but haven't reached consistent profitability
• you're in tech, SaaS, or other industries where revenue multiples are standard

Use discounted cash flow if:

• your business has predictable cash flows
• you're planning significant capital investments
• you want to factor in future growth potential

Use entry-cost analysis if:

• your business could be replicated by purchasing similar assets
• you don't have unique intellectual property or customer relationships
• you want to establish a floor value based on replacement cost

When in doubt, calculate using multiple methods and compare results. This gives you a range rather than a single number, which is more realistic for negotiations.

Factors that affect your company's value

Formulas provide a starting point, but several factors can push your valuation higher or lower.

Factors that increase value:

• Strong customer base: Loyal, recurring customers reduce risk for buyers
• Growth trajectory: Consistent revenue and profit growth signals future potential
• Competitive advantages: Patents, proprietary processes, or exclusive contracts
• Skilled team: Key employees who will stay through a transition
• Clean financials: Accurate, organised records that are easy to verify
• Diversified revenue: Multiple income streams reduce dependency risk

Factors that decrease value:

• Customer concentration: Heavy reliance on a few large customers. In some industries, high concentration can mean the top clients represent more than 30–40% of annual revenue.
• Owner dependency: Business performance tied to one person
• Declining market: Industry headwinds or shrinking demand
• Outdated systems: Technology or processes that need significant investment
• Unresolved liabilities: Pending lawsuits, tax issues, or compliance problems
• Poor documentation: Incomplete records that raise red flags

Understanding these factors helps you focus on improvements that genuinely increase what your business is worth, not just what the formulas suggest.

When to get professional help

Choosing the right valuation method and finding accurate multipliers often requires professional expertise. Consider working with an accountant or certified business valuator if you're facing:

• a high-stakes sale or acquisition
• legal requirements like divorce, estate planning, or shareholder disputes
• complex ownership structures
• significant investment or funding rounds
• regulatory compliance needs

A professional valuation provides a defensible number backed by established methodologies.

For straightforward valuations, you can calculate book value yourself using your balance sheet. You can create balance sheets and pull financial reports on demand in Xero, giving you the data you need.

No valuation method guarantees a sale price. Buyers may value your business differently based on their own analysis and negotiation position. However, knowing your value gives you a stronger starting point.

Use Xero to keep your financial records valuation-ready

Accurate financial records are the foundation of any business valuation. Whether you're preparing to sell, seeking investment, or simply tracking your business's health, you need reliable numbers.

You get real-time access to the financial data valuators need:

• balance sheets showing assets and liabilities at a glance
• profit and loss statements tracking revenue and expenses
• cash flow reports revealing how money moves through your business
• historical data demonstrating trends over time

Clean, organised records make the valuation process faster and give buyers or investors confidence in your numbers. Get one month free and simplify your financial management.

FAQs on valuing a company

Here are answers to common questions about business valuation.

How much is a business worth with $500,000 in sales?

It depends on your industry and profit margins. Using a typical revenue multiplier of 0.5x to 2x, a business with $500,000 in sales might be valued between $250,000 and $1,000,000. Earnings-based methods often give more accurate results for established businesses.

Is a business worth 5 times profit?

Not always. Multipliers typically range from 2x to 10x depending on industry, growth potential, and risk factors. A stable local business might sell for 2–3x profit, while a fast-growing tech company could command 8x or higher.

When should I value my business?

Value your business when you're considering a sale, seeking investment, or bringing in partners. Also value it when planning your exit or going through legal matters like divorce or estate planning. Annual valuations also help track growth and set goals.

How accurate are DIY business valuations?

DIY valuations give you a useful starting point but may miss important factors that professionals would catch. For high-stakes decisions like selling or raising capital, work with an accountant or certified valuator to get a defensible number.

Can accounting software help with business valuations?

Yes. Accounting software like Xero provides the accurate financial data you need for valuations. This includes balance sheets, profit and loss statements, and cash flow reports. Clean records make the process faster and more reliable.