How to value a company: methods, formulas and tips

Published Saturday 21 February 2026

Table of contents

• What is a company valuation?
• When do you need a business valuation?
• Common methods to value a company
• Book value calculation
• Liquidation value calculation
• Multiply company earnings
• Multiply company revenue
• Multiply free cash flow
• Market-based valuation for public companies
• Factors that affect business value
• Which valuation method should you use?
• How to prepare for a business valuation
• When to work with a professional
• FAQs on valuing a company

Key takeaways

• Choose your valuation method based on your business type and purpose: use earnings-based methods for established service businesses, asset-based methods for companies with significant property or equipment, and revenue-based methods for early-stage businesses that aren't yet profitable.
• Prepare thoroughly by organising three to five years of financial records, documenting all revenue streams and assets, and separating personal expenses from business costs to ensure an accurate valuation.
• Recognise that multipliers vary significantly by industry and business characteristics, with service businesses typically selling for 2-3 times profit while manufacturing companies might command 4-5 times profit depending on growth potential and competitive advantages.
• Work with a professional valuator when selling your business, seeking significant investment, or dealing with legal proceedings, as complex valuations require expertise in selecting appropriate methods and determining accurate industry multipliers.

What is a company valuation?

Company valuation is the process of estimating what your business is worth in monetary terms. This figure serves as an estimate rather than a fixed sale price. However, you can use it for financial reporting, as guided by standards like the IFRS 13 Fair Value Measurement, for seeking finance, and for negotiating when you sell.

When do you need a business valuation?

Knowing when to value your business helps you prepare for important financial decisions. Common scenarios include:

• Selling your business: Establish a fair asking price and support negotiations
• Seeking investors: Demonstrate your company's worth to potential backers
• Applying for loans: Provide lenders with evidence of your business value
• Handling partnership disputes: Determine buyout amounts or resolve disagreements
• Managing tax planning: Support estate planning and tax-related decisions
• Preparing for divorce: Establish business value for asset division

Common methods to value a company

Business valuation methods fall into three main categories:

• Asset-based methods: Calculate value based on what your business owns
• Income-based methods: Determine value using earnings and cash flow
• Market-based methods: Compare your business to similar companies

Let's explore specific approaches within each category.

Book value calculation

Book value measures your company's net worth based on its balance sheet. It calculates the difference between what your business owns (assets) and what it owes (liabilities).

Book value formula

Book value = Assets - Liabilities

In other words, it's the net value of everything the company owns after debts are subtracted.

Assets include:

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

Liabilities include:

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

For example, if your business owns $10m in assets and owes $5m in debts, the book value is $5m.

Liquidation value calculation

Liquidation value estimates what owners would receive after selling all assets and repaying all debts. Unlike book value, it uses current market prices rather than recorded values.

This distinction matters because market values fluctuate. Factors that affect what you'd actually receive include:

• temporary changes in demand
• increased competition
• obsolete technology
• market disruption

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

Multiply company earnings

Earnings-based valuation calculates your company's worth as a multiple of its annual profit. This method is one of the most common approaches for valuing small businesses.

Earning-based calculation formula

Company value = Earnings x Multiplier

Two variables determine your valuation:

• Earnings figure: use either net profit or EBITDA (earnings before interest, taxes, depreciation, and amortisation)
• Multiplier: ranges from 2x–10x or higher depending on your business

Businesses command higher multipliers when they have:

• loyal customer bases
• market exclusivity
• protected intellectual property
• other hard-to-replicate advantages

Standard multipliers often exist for specific industries. A local accountant or business broker can tell you the typical range for your type of business.

Multiply company revenue

Revenue-based valuation (also called times-revenue valuation) calculates your company's worth as a multiple of annual sales rather than profit. This approach works well for early-stage or high-growth businesses that aren't yet profitable but show strong revenue.

Times-revenue formula

Company value = Annual revenue x Multiplier

As with the earning-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.

Multiply free cash flow

Free cash flow valuation measures your company's worth based on the money remaining after covering operating costs and planned capital expenditure. This method shows whether your business can fund improvements while maintaining normal operations.

Free cash flow formula

Company value = Free cash flow x Multiplier

This method works well for businesses that need upgrades, such as:

• new equipment
• shop refits
• digital improvements

Calculating free cash flow requires detailed analysis to determine necessary capital expenditures. Consider working with an accountant for accurate figures.

Market-based valuation for public companies

If you're valuing a publicly traded company, two market-based methods provide quick calculations. These methods apply only to publicly traded companies.

Market capitalisation

Market capitalisation is the total combined value of all a company's shares. It provides a straightforward snapshot of what the market believes a public company is worth.

Enterprise value

Enterprise value builds on market capitalisation by adjusting for debt and cash reserves. This gives a more complete picture of what it would cost to acquire the entire company.

Enterprise value is often used alongside the debt-to-equity ratio to understand how much of a company's operations are financed with debt.

For private small businesses, use the asset-based or income-based methods above instead.

Factors that affect business value

Understanding what influences your business value helps you improve it before seeking a valuation. Key factors include:

• Profitability and growth trends: Consistent profits and revenue growth command higher valuations
• Customer concentration: Businesses with diverse customer bases reduce buyer risk
• Industry outlook: Growing industries typically receive higher multipliers
• Competitive advantages: Unique technology, patents, or market position increase value
• Financial health: Strong cash flow and manageable debt improve valuations
• Management and systems: Businesses that can run without the owner are more valuable, though many SMEs also place a high value on non-financial objectives like maintaining family control and company culture
• Market conditions: Economic climate and buyer demand affect what someone will pay

Which valuation method should you use?

Choosing the right method depends on your business type, stage, and purpose for the valuation.

• For established service businesses: Use earnings-based methods. Service businesses typically rely on profit more than physical assets.
• For asset-heavy businesses: Use book value or liquidation value if you own significant property, equipment, or inventory.
• For early-stage or high-growth businesses: Use revenue-based methods when you're not yet profitable but show strong sales growth.
• For businesses preparing to sell: Consider multiple methods to establish a value range, then work with a professional to determine the most appropriate approach.
• For financial reporting or tax purposes: Follow accounting standards and regulatory requirements, which often specify particular methods and are periodically updated to clarify the definition of a business.

How to prepare for a business valuation

Preparing properly helps ensure an accurate valuation and a smooth process. Follow these steps to get ready.

1. Organise your financial records: Gather three to five years of tax returns, profit and loss statements, and balance sheets.
2. Document revenue streams: Compile customer lists, contracts, and recurring revenue details.
3. List all assets: Create an inventory of equipment, property, intellectual property, and other assets.
4. Review outstanding liabilities: Document all debts, loans, and financial obligations.
5. Prepare business documentation: Gather employee contracts, supplier agreements, and operational procedures.
6. Clean up financial statements: Separate personal and business expenses and adjust for one-time events.

You can create financial reports on demand using accounting software, making it easy to pull the statements you need.

When to work with a professional

Selecting the right valuation method and finding accurate multipliers requires expertise. While you can calculate basic book value from your balance sheet, complex valuations benefit from professional guidance.

Consider hiring a professional valuator when you're:

• selling your business or negotiating with buyers
• seeking significant investment or financing
• involved in legal proceedings like divorce or partnership disputes
• preparing for tax or estate planning
• dealing with complex business structures or intellectual property

These methods provide estimates that may differ from what you receive in an actual sale. Valuation can be subjective, and buyers often have their own perspective on value. However, knowing your business value helps guide negotiations and financial planning.

For simpler needs, your accountant can often provide guidance on appropriate methods and industry multipliers. Whether you're preparing for a professional valuation or tracking financial metrics that affect your business value, you can get real-time visibility into your financial performance with Xero. You can create balance sheets and pull reports on demand.

Get one month free and see how easy it is to track the metrics that matter. You can also find an accountant near you in our directory.

FAQs on valuing a company

Here are answers to common questions about business valuation.

Is a business worth five times profit?

The multiplier varies by industry and business characteristics. Service businesses typically sell for 2–3 times profit, while manufacturing companies might command 4–5 times profit. Your specific multiplier depends on growth potential, customer concentration, and competitive advantages.

Can I value my business myself?

You can calculate basic valuations like book value using your balance sheet. However, selecting the right method, determining appropriate multipliers, and accounting for intangible factors requires expertise. Self-calculated valuations work for informal purposes, but hire a professional when the valuation affects significant financial or legal decisions.

How much does a professional business valuation cost?

Professional valuations vary in cost depending on your business size, complexity, and the valuation's purpose. Simpler businesses with straightforward finances cost less, while companies with multiple locations or complex intellectual property cost more.

How often should I get my business valued?

Value your business annually if you're actively growing or planning to sell within a few years. For stable businesses without near-term sale plans, valuations every three to five years suffice. You should also get a valuation before major decisions like bringing on partners or seeking investment.

What's the difference between business valuation and appraisal?

Business valuation determines the overall economic value of your entire business using multiple methods and considering future earnings potential. An appraisal typically assesses the market value of specific physical assets at a point in time. You need a business valuation for selling or financing your company, while appraisals work for insurance or collateral purposes.