How to value a company: 6 methods and key formulas

Published Friday 20 February 2026

Table of contents

• What is a company valuation?
• Why value your company
• How to value a company
• Factors that affect your company's value
• Choosing the right valuation method
• When to get professional help
• Track your business value with Xero
• FAQs on company valuation

Key takeaways

• Use multiple valuation methods to get a complete picture of your company's worth, as different approaches like earnings multiples, book value, and revenue multiples each reveal different aspects of your business value.
• Choose the right valuation method based on your business type - service businesses work best with earnings or revenue multiples, while asset-heavy businesses should start with book value or liquidation value calculations.
• Focus on improving key value drivers like customer diversification, predictable revenue streams, and reducing owner dependency, as these factors significantly influence what buyers will actually pay beyond the basic formulas.
• Get professional help for formal situations like selling your business, partnership disputes, or legal requirements, while using self-calculated estimates for internal planning and tracking your progress over time.

What is a company valuation?

A company valuation estimates the monetary worth of your business. It doesn't set or guarantee a sale price, but it gives you a useful number for financial reporting, seeking finance, and negotiating a sale.

Why value your company

Understanding your company's worth helps you make confident business decisions. You might need a valuation when you're:

• Selling your business: A solid valuation strengthens your negotiating position
• Seeking financing: Banks and investors want to know what your business is worth
• Bringing on partners: Fair buyouts and equity splits require accurate valuations
• Planning your estate: Succession planning and tax purposes need documented values
• Tracking growth: Regular valuations show whether your decisions are building value

Each situation may call for a different approach or require more precise figures.

How to value a company

Each method to estimate your company's value suits different business types and situations. Read on to learn how each works, then see which approach fits your needs.

1. Book value calculation

Book value is the net worth of your business based on your balance sheet. While it's a straightforward calculation (assets minus liabilities), its components are crucial in more complex models; in one analysis, the portion of value estimates represented by book value was as high as 72% within the residual income model.

Book value formula

Book value = Assets - Liabilities

Assets include: property, inventory, equipment, cash reserves, accounts receivable, and intellectual property like patents.

Liabilities include: loans, unpaid taxes, and accounts payable (bills you owe).

Example: If your business owns R10m in assets and owes R5m in debts, your book value is R5m.

2. Liquidation value calculation

Liquidation value estimates what you'd have left if you sold all assets at current market prices and repaid all debts.

This differs from book value because market prices fluctuate. Changes in demand, competition, technology, or market conditions can all affect what you'd actually receive when selling assets.

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

3. Multiply company earnings

Earnings multiples value your company based on its annual profit, a common approach supported by research. For instance, a 2023 study found that price-to-earnings (P/E) was among the preferred valuation models in 20 out of 25 major industry groups. You multiply your earnings by an industry-specific factor to estimate total business value.

Earning-based calculation formula

Company value = Earnings x Multiplier

Earnings figure: Use either net profit or EBITDA (earnings before interest, taxes, depreciation, and amortisation).

Multiplier range: Typically two times to 10 times or more, depending on your industry and business characteristics.

Higher multipliers go to businesses with loyal customer bases, market exclusivity, protected intellectual property, and other hard-to-replicate advantages.

4. Multiply company revenue

Revenue multiples value your company based on annual sales rather than profit. This approach, also called times-revenue valuation, works well for businesses that aren't yet profitable.

Times-revenue formula

Company value = Annual revenue x Multiplier

The multiplier varies by industry and typically ranges from 0.5 times to three times revenue. Your accountant or business broker can provide the standard range for your business type.

5. Multiply free cash flow

Free cash flow valuation uses the money left after covering operating costs and planned capital spending. This method shows whether your business can fund improvements while maintaining operations, and its importance is industry-specific. For example, research shows price/cashflow is the top valuation metric for the capital goods sector, indicating that cash flow metrics are highly significant in that industry.

Free cash flow formula

Company value = Free cash flow x Multiplier

This method works well for businesses that need upgrades like new equipment, shop refits, or digital improvements.

Keep in mind that calculating free cash flow requires detailed analysis of your capital expenditure needs. Consider working with an accountant for accurate figures.

6. Entry-cost analysis

Entry-cost analysis estimates what it would cost to recreate your business from scratch, including capital expenses, customer acquisition, and brand building.

Best suited for: Asset-driven businesses where value comes primarily from equipment or inventory. For example, a printing company's value might closely match the cost of buying equivalent printing equipment.

Less suited for: Businesses with hard-to-replicate elements like key relationships, proprietary information, or strong brand recognition.

Factors that affect your company's value

Beyond the formulas, several factors influence what buyers will actually pay. Understanding these helps you set realistic expectations.

Key value drivers include:

• Industry conditions: Market trends and sector growth affect multipliers, as research shows the choice of valuation model is often strongly related to the firm's industry.
• Customer concentration: Dependence on a few large customers increases risk
• Revenue predictability: Recurring income commands higher valuations
• Owner dependency: Businesses that run without the owner are worth more
• Growth potential: Scalable operations attract higher offers
• Competitive advantages: Patents, exclusive contracts, and unique products add value
• Financial records: Clean, organised books make due diligence easier
• Team strength: Skilled, stable staff reduce transition risk

Businesses with diversified customers, predictable revenue, and minimal owner dependency typically command higher multiples.

Choosing the right valuation method

Different businesses suit different valuation approaches. Here's how to choose the right method for your situation.

• For service-based businesses: Use earnings or revenue multiples. These businesses have few physical assets, so asset-based methods often undervalue them.
• For asset-heavy businesses: Start with book value or liquidation value, then compare to earnings-based methods. Manufacturing companies and retail stores benefit from multiple approaches.
• For startups and pre-profit companies: Revenue multiples work best when you're not yet profitable. Entry-cost analysis can also help in capital-intensive industries.
• For quick estimates: Times-revenue and book value are simplest to calculate from your financial statements.
• For formal valuations: Use multiple methods and compare results. Professional valuations typically combine several approaches to find a fair value range.

If you're selling or seeking significant investment, using multiple methods gives you a stronger negotiating position.

When to get professional help

While the methods above help you estimate your company's value, some situations call for professional expertise.

Consider hiring a professional valuer when you're:

• Selling your business (formal valuations strengthen negotiations)
• Facing partnership disputes or buyout situations
• Dealing with complex operations (multiple revenue streams, international business, significant IP)
• Meeting legal requirements (divorce, estate planning, tax purposes), where professional standards require that the final issued expert report be retained for several years, especially if used in judicial proceedings.
• Seeking major investment (investors often require independent valuations)

Types of valuation professionals:

• Chartered business valuators
• Business brokers
• Merger and acquisition advisors
• Accountants with valuation expertise

Professional valuations typically cost between R50,000 and R200,000 depending on your business complexity. Many accountants offer initial assessments at lower rates.

Find qualified accountants and business advisors in the Xero advisor directory.

Track your business value with Xero

Accurate valuations start with solid financial records. Xero gives you real-time access to the reports you need, including balance sheets, profit and loss statements, and cash flow tracking, whether you're calculating book value yourself or preparing for a professional valuation.

With automated bank reconciliation and organised financial data, you can monitor your business performance and understand how your company's value changes over time. Get one month free and see how clear financial visibility supports confident business decisions.

FAQs on company valuation

Still have questions about valuing your company? Here are answers to common concerns.

Which valuation method is most accurate for small businesses?

No single method is universally accurate. Earnings multiples work best for profitable businesses, while asset-heavy companies benefit from book value calculations. The best approach uses multiple methods and compares results.

What's a typical earnings multiplier for my industry?

Service businesses typically sell for two–three times annual profit. Manufacturing companies often command four–five times profit. Technology businesses with recurring revenue may see five–seven times or higher. Your accountant can provide current multipliers for your industry.

How much does a professional business valuation cost?

Professional valuations typically range from R50,000 to R200,000, depending on business size and complexity. Some accountants offer preliminary assessments for R10,000–R30,000.

Can I value my business myself, or do I need an expert?

You can calculate reasonable estimates using this guide for internal planning or initial discussions. Get professional help when selling, dealing with legal requirements, or seeking major investment.

How often should I value my business?

Value your business annually to track progress. Also get a valuation when considering major changes like selling, bringing on partners, or seeking financing.