How to value a business: six methods with examples

Published Friday 13 February 2026

Table of contents

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

Key takeaways

• Apply multiple valuation methods to get the most accurate picture of your business worth, matching your approach to your business type: use asset-based methods for manufacturing or real estate, earnings-based for profitable service businesses, and revenue-based for high-growth startups.
• Prepare thoroughly for valuation by organising at least three years of financial statements, gathering supporting documentation like contracts and lease agreements, and cleaning up your accounting records to remove personal expenses and one-time items.
• Recognise that factors beyond financial formulas significantly impact your business value, including customer loyalty, competitive advantages, revenue diversification, and management independence from the owner.
• Hire a professional valuator for high-stakes situations like selling your business, bringing on investors, legal proceedings, or securing financing, as they provide credible, defensible assessments that follow recognised professional standards.

Table of contents

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

Key takeaways

• Estimate your business's value using six main methods: book, liquidation, earnings-based, times-revenue, discounted cash flow, and entry-cost
• Choose your method based on your business type, available data, and valuation purpose
• Consider factors beyond formulas, including customer loyalty, competitive advantages, and market conditions
• Hire a professional valuator for high-stakes transactions, legal requirements, or complex business structures
• Prepare for valuation by organising financial statements, gathering documentation, and cleaning up your books

What is a business valuation?

Business valuation is the process of determining your company's monetary worth, a practice governed by professional guidelines like the American Institute of Certified Public Accountants' (AICPA) Statement on Standards for Valuation Services. Knowing this number helps you set realistic sale prices, attract investors, plan for succession, and secure financing.

Common reasons you might need a business valuation:

• Sell your business: Set a realistic asking price for negotiations
• Attract investors: Demonstrate your company's worth to potential backers
• Meet compliance requirements: Satisfy accounting, legal, and financial reporting obligations
• Plan for succession: Support ownership transfers and buy-sell agreements
• Secure financing: Provide lenders with credible collateral valuations

A valuation provides an estimate, not a guaranteed selling price. The final price depends on buyer demand, competition, intangible assets, growth potential, and current market conditions.

Six methods to value your business

Here are six proven methods to value your business. These fall into three broad categories: asset-based methods (book value, liquidation value), income-based methods (earnings, revenue, discounted cash flow), and cost-based methods (entry cost).

1. Book valuation

Book valuation calculates your business worth using a simple formula: value = assets − liabilities. This method treats your business as the sum of everything it owns minus everything it owes, but professional standards advise it shouldn't be the sole appraisal approach for an operating business unless it's customary in that industry.

Example: A business with $10 million in assets and $5 million in debts has a book value of $5 million.

Assets include:

• Physical property: land, buildings, vehicles, equipment, inventory
• Financial assets: cash and accounts receivable
• Intellectual property: copyrights, trademarks, patents

Liabilities include:

• Debt obligations: business loans and credit lines
• Outstanding payments: taxes owed and accounts payable

2. Liquidation value

Liquidation value estimates what you'd receive if you closed your business, sold all assets, and paid off all debts. Unlike book value, liquidation value reflects current market prices rather than original purchase prices minus depreciation.

This method is most useful when considering business closure or assessing minimum value in a worst-case scenario.

3. Earnings-based valuation

Earnings-based valuation determines your business worth by multiplying annual earnings by an industry multiplier. The formula is: value = earnings × multiplier.

Example: A business earning $350,000 annually with a 2x multiplier is worth $700,000. With a 5x multiplier, the same business is worth $1,750,000.

Typical multiplier ranges:

• 2–3x: Basic service businesses with high competition
• 4–6x: Established businesses with steady customer bases
• 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, 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): Typically higher than net profit

4. Times-revenue valuation

Times-revenue valuation calculates your business worth using a 'rule of thumb' formula: value = revenue × multiplier. According to professional standards, such rules of thumb are best used as reasonableness checks and should not be a standalone valuation method.

This method works well for businesses that aren't yet profitable but have strong sales, such as startups or high-growth companies. Revenue multipliers are typically lower than earnings multipliers because revenue doesn't account for costs.

Example: A business with $500,000 in annual revenue and a 1.5x multiplier is worth $750,000.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow instead of profit or revenue. Free cash flow is the money remaining after paying all operating expenses and reinvesting in your business.

The formula is: value = free cash flow × multiplier

Why DCF is less common for small businesses:

• Requires detailed financial analysis beyond basic profit and loss
• Often needs help from a professional valuator
• Demands comprehensive records of capital expenditures and cash flows

When to use DCF: This method works best for businesses with significant equipment, property, or technology investments where maintenance costs vary year to year.

6. Entry-cost valuation

Entry-cost valuation estimates what it would cost to build an equivalent business from scratch. If recreating your business would cost $50,000, then your existing business is likely worth at least that amount.

This method should also account for the time and effort needed to build customer relationships and brand reputation. Entry-cost valuation works well as a sense-check against other methods. If your times-revenue valuation shows $300,000 but entry-cost shows $100,000, you may need further analysis to find the true value.

Which valuation method should you use?

The right valuation method depends on your business type, available financial data, and why you need the valuation. Using multiple methods often gives you the most realistic picture.

Match your method to your business:

• Asset-heavy businesses (manufacturing, real estate): Use book or liquidation valuation when value is tied to physical assets
• Service businesses with steady profits: Use earnings-based valuation to reflect income-generating ability
• High-growth startups or tech companies: Use times-revenue or DCF to capture future potential, even without current profitability

Start by deciding why you need a valuation. Selling to a buyer requires different methods than securing a bank loan or planning succession.

When to hire a professional valuator

A chartered business valuator (CBV) provides an objective, defensible assessment of your company's worth, often by adhering to a widely recognised standard like the Uniform Standards of Professional Business Practice (USPAP). Consider hiring a professional when you're:

• Selling your business: Need a credible starting point for negotiations
• Bringing on investors or partners: Need to determine share prices and ownership stakes
• Navigating legal processes: Divorce, shareholder disputes, or estate planning require formal valuations
• Applying for financing: Some lenders require professional valuations as part of the loan process
• Planning your estate or business succession for tax purposes

A professional valuator adds credibility and can identify value drivers you might overlook.

Factors that affect business value

Many factors beyond formulas affect what buyers will pay for your business. Understanding these helps you set realistic expectations and identify ways to increase your company's value.

Factors that increase business value:

• Customer loyalty: Long-term contracts and repeat customers reduce risk for buyers
• Competitive advantages: Patents, exclusive agreements, or unique market positions
• Diversified revenue: Multiple income streams reduce dependency on any single customer or product
• Strong management team: Businesses that don't rely solely on the owner are more attractive
• Growth trends: Consistent revenue and profit growth signal future potential
• Clean financial records: Accurate, well-organised books build buyer confidence

Factors that decrease business value:

• Customer concentration: Relying on one or two customers for most revenue increases risk
• Key person dependency: If the business can't run without you, buyers see added risk
• Declining markets: Shrinking industries or outdated products reduce future potential
• Outstanding liabilities: Unresolved legal issues, tax problems, or debt obligations
• Poor documentation: Incomplete records make due diligence difficult and raise red flags

How to prepare for a business valuation

Getting your financial house in order before a valuation helps you achieve a more accurate result and builds credibility with buyers, investors, or lenders.

1. Organise your financial statements

Gather at least three years of profit and loss statements, balance sheets, and cash flow statements. Since professional standards often require valuators to retain documentation for a minimum of five years, having several years of records prepared is a crucial step. Make sure they're accurate, up to date, and easy to understand. If you use accounting software like Xero, you can generate these reports instantly.

1. Gather supporting documentation

Collect documents that support your financial claims and business operations:

• Customer contracts and supplier agreements
• Lease agreements and property records
• Employee records and organisational charts
• Insurance policies and legal documents

1. Clean up your accounting records

Review your books for errors, missing entries, or personal expenses mixed with business costs. Normalise your financials by removing one-time expenses or unusual items that don't reflect ongoing operations.

1. Document intangible assets

List assets that don't appear on your balance sheet but add value:

• Brand reputation and customer relationships
• Patents, trademarks, and proprietary processes
• Trained workforce and established systems
• Market position and competitive advantages

Make informed business decisions with Xero

Understanding your business's value starts with clear, accurate financial data. Xero helps you generate balance sheets, profit and loss statements, and cash flow reports instantly, giving you the numbers you need for any valuation method.

With real-time visibility into your finances, you can track performance, manage cash flow, and prepare for valuations with confidence.

Get one month free and see how Xero makes managing your business finances easier.

FAQs on business valuation

Here are answers to some common questions about business valuation.

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

Using a times-revenue method with a 1–2x multiplier, a business with $500,000 in sales could be worth $500,000 to $1 million. The exact value depends on profitability, industry, and growth potential.

Is a business worth 3 times profit?

Not always. A 3x profit multiplier is a common benchmark, but the right number depends on your industry, growth prospects, and risk factors. Stable businesses often command higher multipliers.

How much is a business worth that makes $100,000 a year?

Using an earnings-based method with a 2–4x multiplier, a business earning $100,000 annually could be worth $200,000 to $400,000. Higher multipliers apply to businesses with strong growth, loyal customers, or competitive advantages.

How do you calculate business valuation?

Multiply your annual revenue or profit by an industry multiplier. A business with $500,000 in revenue and a 2x multiplier would be valued at $1 million.

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

Business valuation is a calculated estimate based on financial data and formulas. Market value is the actual price a business sells for. Professional standards formally define this as the price between a hypothetical willing buyer and seller in an open market, where both are knowledgeable and not under pressure to complete the transaction. A valuation informs negotiations, but the final market value depends on what a buyer is willing to pay.