Business valuation: Value your business with six key methods

Published Thursday 5 February 2026

Table of contents

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

Key takeaways

• Prepare organised financial records including balance sheets, profit and loss statements, and cash flow data before starting any valuation, as accurate calculations depend on clean, up-to-date information.
• Choose your valuation method based on your business type and purpose: use earnings-based methods for profitable service businesses, times-revenue for high-growth companies, and asset-based approaches for businesses with significant physical assets.
• Apply multiple valuation methods and compare results to get a realistic picture of your business worth, as different approaches can reveal different aspects of value and help validate your estimates.
• Hire a professional valuator for legal proceedings, major sales, or investor negotiations where credibility matters, but handle DIY valuations for internal planning and preliminary assessments.

What is a business valuation?

Business valuation is the process of determining your company's monetary worth. Knowing this number helps you make informed decisions about selling, seeking investment, or planning for the future, especially as experts continually analyse the latest trends and challenges in the field.

Common reasons you might need a business valuation:

• Set a realistic asking price when selling your business
• Demonstrate company worth to potential investors
• Meet legal requirements for financial reporting and compliance
• Plan succession for ownership transfers and buy-sell agreements
• Secure financing by providing lenders with collateral valuations

A valuation differs from a selling price. Your valuation provides a starting point, but the final price depends on market demand, competition, and timing.

External factors also play a role. Economic conditions, industry trends, and even geopolitical events can influence what buyers are willing to pay.

When you need a business valuation

A business valuation becomes necessary at key moments in your company's lifecycle. Some situations require a formal professional valuation, while others allow for a DIY estimate.

Common situations that trigger a valuation:

You may need a valuation in these circumstances:

• Selling your business: Set a realistic asking price and support negotiations
• Bringing on partners or investors: Determine fair share prices and ownership stakes
• Succession planning: Prepare for ownership transfers or estate planning
• Divorce or partnership dissolution: Divide business assets fairly
• Securing financing: Provide lenders with collateral documentation
• Tax planning: Meet compliance requirements for certain transactions
• Insurance purposes: Ensure adequate coverage for business assets
• Annual planning: Track your progress and make informed growth decisions

Some of these situations, particularly legal proceedings and certain financing deals, require a formal valuation from a certified professional. For internal planning and preliminary discussions, a DIY valuation using the methods in this guide may be sufficient.

How to prepare for a business valuation

Accurate valuations depend on organised, up-to-date financial records. Taking time to prepare your data before calculating improves accuracy and saves time.

1: Organise your financial statements

Gather your most recent balance sheets, profit and loss statements, and cash flow statements. Cloud accounting software like Xero generates these reports instantly, so you don't have to wait for your accountant.

2: Clean up your books

Reconcile all accounts, categorise expenses properly, and update accounts receivable and payable. Messy books lead to inaccurate valuations.

3: Document your assets

List all physical assets (equipment, inventory, property), intellectual property (patents, trademarks, copyrights), and intangible assets (customer lists, contracts).

4: Identify your liabilities

Record outstanding loans, pending obligations, and any contingent liabilities that could affect value.

5: Gather supporting documentation

Collect customer contracts, lease agreements, employee records, and any data showing growth trends or projections.

6: Research industry benchmarks

Understand typical multipliers for your industry and how your business compares to competitors. This context helps you interpret your valuation results.

Three business valuation approaches

The six valuation methods fall into three main approaches. Understanding these categories helps you choose the right method for your situation.

Asset-based approach

This approach focuses on what your business owns:

• Book value: Assets minus liabilities
• Liquidation value: What you'd receive if you sold everything today

Income-based approach

This approach values your business based on earnings:

• Earnings-based: Annual profits × industry multiplier
• Times-revenue: Annual sales × industry multiplier
• Discounted cash flow: Free cash flow × multiplier

Cost-based approach

This approach considers replacement costs:

• Entry-cost: What it would cost to build your business from scratch

Most small businesses use income-based methods because they reflect your business's ability to generate money for you. This aligns with legal precedent, where income-based methods like Discounted Cash Flow (DCF) are applied to ongoing concerns with historical profit data, while asset-based methods are reserved for newer ventures.

Six methods to value your business

Multiple formulas exist for valuing a business. The right method depends on your industry, financial data, and why you need the valuation. Here are six proven approaches.

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 standard accounting practices often exclude valuable internally generated intangible assets like brand reputation and customer relationships from the balance sheet.

Assets include items your business owns:

• Land, buildings, vehicles, equipment, and inventory
• Cash and accounts receivable (money customers owe you)
• Intellectual property such as copyrights, trademarks, and patents

Liabilities include what your business owes:

• Business loans and credit lines
• Taxes owed and accounts payable (unpaid bills)

Example calculation: If your business has $10 million in assets and $5 million in debts, your book value is $5 million.

2. Liquidation value

Liquidation value estimates what you'd receive if you closed the business, sold all assets, and paid off all debts today.

This differs from book value because assets are valued at their current sale price, not their original purchase price minus depreciation. Liquidation value often produces a lower figure, especially for equipment that depreciates quickly.

3. Earnings-based valuation

Earnings-based valuation determines your business worth using this formula: value = annual earnings × industry multiplier. For example, an analysis of over 30,000 public companies found that the broadcasting industry has an average EBITDA multiple of 2.39, which aligns with the lower end of typical multipliers.

Typical multiplier ranges

Multipliers vary based on business type and market conditions:

• 2–3x: Basic service businesses in competitive markets
• 4–6x: Established businesses with steady customer bases
• 7x or higher: Businesses with strong competitive advantages or growth potential

Factors that increase your multiplier

Several factors can justify a higher multiplier for your business:

• Customer loyalty: Long-term relationships with 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

Which earnings figure should you use?

You can choose between two common earnings measures:

• Net profit: Bottom-line earnings after all expenses (use for straightforward calculations)
• EBITDA: Earnings before interest, taxes, depreciation, and amortisation (use for comparing businesses across industries)

Example: If your business earns $350,000 annually and uses a two times multiplier, the value is $700,000. With a five times multiplier, the value is $1,750,000.

4. Times-revenue valuation

Times-revenue valuation uses this formula: value = annual revenue × industry multiplier.

This method works well for high-growth businesses or those not yet profitable. Because it uses revenue rather than profit, multipliers are typically lower than those used in earnings-based valuations.

5. Discounted cash flow valuation

Discounted cash flow (DCF) valuation uses free cash flow rather than profit or revenue. Free cash flow is the money remaining after you pay operating expenses and reinvest in your business.

The formula is: value = free cash flow × multiplier

Why DCF is less common for small businesses

Several factors make this method challenging for smaller operations:

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

When to consider 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 you could replicate your business for $50,000, then the existing business is likely worth at least that amount.

This method should also account for time invested and customer goodwill, which can take years to develop.

Using entry-cost as a reality check: Compare your entry-cost estimate against other valuation methods. If times-revenue gives you $300,000 but entry-cost suggests $100,000, you may need further analysis to find the true value.

Which valuation method should you use?

Multiple approaches can be valid, and combining methods often gives the most realistic picture. The right valuation method depends on your business type and goals.

Match your method to your business

Different business types suit different valuation approaches:

• 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 or pre-profit businesses: Use times-revenue or DCF to account for future potential

Start with your purpose. Are you selling, seeking investment, or planning succession? Your goal shapes which method matters most.

Factors that affect business value

Multiple factors beyond your calculations influence what buyers will actually pay. Understanding these drivers helps you set realistic expectations and identify ways to increase your business's value.

Financial factors

These financial elements influence your business value:

• Consistent revenue growth over multiple years
• Strong profit margins compared to industry benchmarks
• Healthy, predictable cash flow
• Diversified customer base (low concentration risk)

Operational factors

How you run your business also affects its value:

• Documented systems and processes
• Strong management team that can operate without the owner
• Skilled, stable workforce
• Efficient operations with room for improvement

Market factors

External market conditions play a significant role:

• Clear competitive advantages
• Strong brand recognition and market position
• Favourable industry growth trends
• High customer loyalty and retention rates

Risk factors that decrease value

Certain risks can lower your business's perceived value:

• Heavy dependence on one or two major customers
• Business relies too heavily on the owner
• Declining industry or market
• Pending litigation or compliance issues
• Poor or incomplete financial records

When to hire a professional valuator

A chartered business valuator (CBV) provides an objective, defensible assessment of your company's worth. While DIY valuations work for internal planning, certain situations require professional expertise, especially for tax purposes, as one survey found that tax valuations are the main profit driver for valuation firms.

When professional valuation is required

Certain situations mandate a formal professional valuation:

• Legal proceedings (divorce, shareholder disputes, estate planning)
• Certain types of financing that mandate formal valuations
• Tax-related transactions with compliance requirements
• Regulatory filings that specify valuation standards

When professional valuation is recommended

Professional help is advisable in these situations:

• Selling your business (buyers expect credible documentation)
• Bringing on investors or partners (determines fair share prices)
• Complex business structures with multiple entities
• High-stakes transactions where accuracy matters
• Businesses with significant intangible assets

Benefits of hiring a professional

A professional valuator offers several advantages:

• Objective assessment that holds up to scrutiny
• Credibility with buyers, investors, and lenders
• Deep understanding of industry benchmarks
• Compliance with legal and regulatory standards

When DIY valuation may be sufficient

You can handle valuation yourself in these cases:

• Internal planning and goal-setting
• Preliminary assessment before engaging professionals
• Annual business health checks
• Early-stage discussions with potential buyers
• Small-scale transactions with limited complexity

Make informed business decisions with Xero

Understanding your business's value puts you in control of major decisions, whether you're planning for growth, considering a sale, or seeking investment.

Accurate, up-to-date financial records make valuation faster and more credible. With Xero, you can generate balance sheets and profit and loss statements instantly, giving you the data you need when you need it.

Get one month free and see how Xero helps you stay on top of your business finances.

FAQs on business valuation

Here are answers to common questions about valuing your business.

How do you calculate business valuation?

Multiply your annual revenue or profit by an industry multiplier. For example, a business with $500,000 in revenue and a two times multiplier would be valued at $1 million. The right multiplier depends on your industry, profitability, and growth potential.

Is a business worth three times profit?

It depends. While three times profit is a common benchmark, multipliers range from 2x–7x or higher depending on your industry, growth prospects, and customer loyalty. Stable, established businesses typically command higher multiples than newer or riskier ventures.

How much is a business worth with $500,000 to $1 million in sales?

A business with $500,000 in sales might be worth $250,000 to $1.5 million, while one with $1 million in sales could range from $500,000 to several million. The value depends on profitability, assets, and industry.

A highly profitable tech company will be worth far more than a low-margin retail business with the same revenue.

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. While valuation informs negotiations, market value ultimately depends on what a buyer is willing to pay.

How long does a business valuation take?

A DIY valuation can take a few hours to a few days, depending on how organised your financial records are. Professional valuations typically take two to four weeks, depending on business complexity and the valuator's workload.

Can I value my business myself or do I need a professional?

You can perform initial valuations yourself for internal planning using the methods in this guide. Professional valuations are required for legal matters (divorce, disputes, estate planning) and recommended for sales, major investments, or complex business structures where credibility matters.