Company valuation: How it works and methods for your small business to follow

Published Friday 5 December 2025

Table of contents

• What is a company valuation?
• Prepare for your valuation
• Choose the right valuation method
• How to value a company
• 1. Book value calculation
• 2. Liquidation value calculation
• 3. Multiply company earnings
• 4. Multiply company revenue
• 5. Multiply free cash flow
• 6. Entry-cost analysis
• 7. Market capitalisation
• 8. Enterprise value
• Professional vs DIY valuation
• Industry factors that affect company value
• Understanding valuation limitations
• FAQs on company valuation

Key takeaways

• Prepare comprehensive financial documentation including profit and loss statements, balance sheets, and cash flow statements for the last three to five years before beginning any valuation process.

• Apply multiple valuation methods such as book value, earnings multipliers, and revenue multipliers to establish a realistic value range rather than relying on a single calculation.

• Recognise that DIY valuations using basic formulas work well for internal planning and goal-setting, while professional valuations are essential for formal purposes like selling your business or seeking investment.

• Understand that industry-specific multipliers and market conditions significantly impact your company's value, making it important to research standard multipliers for your particular sector.

What is a company valuation?

Company valuation means working out your business's monetary worth using established financial methods. This estimated value helps you make informed decisions about selling, seeking investment, or seeking finance, though it doesn't guarantee your final sale price.

Prepare for your valuation

Before you can put a number on your business, you need to get your information in order. A clear and accurate picture of your business makes any valuation method more reliable.

• gather your key financial statements, including your profit and loss statement, balance sheet and cash flow statement for the last three to five years, and store them in your accounting software
• list all your business assets, both tangible (such as equipment, property and inventory) and intangible (such as patents, trademarks and customer lists), and note any that must be tested for impairment each year
• collect important legal paperwork, such as your business registration, leases and any contracts with customers or suppliers
• update your business plan, marketing strategies and forecasts so they clearly show your potential for future growth

Choose the right valuation method

There isn't one single way to value a business, and the best method often depends on your industry and the reason for the valuation.

• Asset-based methods like book value are often used for businesses with significant tangible assets, such as manufacturing or real estate companies.
• Earnings-based methods are better suited for established, profitable businesses like professional services or retail stores, where consistent profit is a key driver of value.
• Market-based methods look at what similar businesses have sold for. This can be useful, but it requires good data on comparable sales in your industry.

Many accountants and advisors recommend using a combination of two or three methods to arrive at a more balanced and realistic valuation range.

How to value a company

Here are ways to value a company.

1. Book value calculation

Book value calculation determines your company's worth by subtracting total liabilities from total assets on your balance sheet. This method shows the net value of everything your business owns after debts are paid.

Book value formula

Book value = Assets - Liabilities

Assets include:

• Property, inventory, and equipment
• Cash reserves and accounts receivable
• Intellectual property like patents

Liabilities include:

• Loans and unpaid taxes
• Accounts payable (bills you owe)

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

2. Liquidation value calculation

Liquidation value calculates what you'd receive if you sold all assets and paid all debts at current market prices, with accounting standards defining the fair value of a financial liability as no less than the amount payable on demand. This differs from book value because market conditions affect actual selling prices.

Why market value matters:

• Demand changes can reduce asset values
• Competition affects selling prices
• Technology can make assets obsolete
• Market disruption impacts actual sale proceeds

Liquidation valuation formula

Company value = Liquidation value of assets – Liabilities

3. Multiply company earnings

Earnings-based valuation multiplies your annual profits by an industry-standard number to estimate company value. This method works well for profitable businesses with consistent earnings.

Earning-based calculation formula

Company value = Earnings x Multiplier

Two key components determine your valuation:

Earnings options:

• Net profit (after all expenses)
• EBITDA (before interest, taxes, depreciation, amortisation)

Multiplier factors (2x to 10x+):

• Loyal customer base increases multiplier
• Market exclusivity adds value
• Protected intellectual property boosts worth
• Industry-standard multipliers apply

4. Multiply company revenue

Revenue-based valuation multiplies your annual sales by an industry multiplier to estimate company value. This method uses total revenue instead of profit, making it useful for businesses with low margins or those reinvesting heavily in growth.

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.

5. Multiply free cash flow

Free cash flow valuation multiplies the money remaining after operating costs and planned investments by an industry multiplier. This method shows your business's true cash-generating ability and funding capacity for future growth.

Free cash flow formula

Company value = Free cash flow x Multiplier

Best for businesses planning:

• Equipment upgrades
• Shop refits
• Digital improvements

This method reveals whether your business generates enough cash to fund growth while covering normal operations. Professional analysis helps determine accurate capital expenditure requirements.

6. Entry-cost analysis

Entry-cost analysis estimates your company's value by calculating what it would cost to recreate your business from scratch. This includes startup costs, customer acquisition, and brand building expenses.

Works best for:

• Asset-heavy businesses
• Companies with replicable processes
• Businesses without unique advantages

Not suitable for businesses with:

• Key customer relationships
• Proprietary information
• Established goodwill
• Hard-to-replicate advantages

7. Market capitalisation

For publicly traded companies, market capitalisation is the total combined value of all the company's ordinary shares. You usually exclude certain securities, such as preference shares and convertible options, from this calculation.

Share price formula

Company value = share price × number of shares

8. Enterprise value

This method also applies to publicly traded companies. It takes the combined value of all the company's shares but makes adjustments for debt and for cash held in reserves.

Enterprise value formula

Company value = Market capitalisation + Cash – Debts

This provides a more comprehensive valuation snapshot than the market cap alone for publicly traded companies. This is often used with the Debt-to-Equity (D/E) ratio, also known as gearing, to understand how much debt is financing operations, as a ratio considered high for the industry can affect perceived risk and value.

Professional vs DIY valuation

Deciding whether to value your business yourself or hire an expert comes down to your needs.

• DIY valuation: Using the formulas in this guide can give you a useful estimate for internal planning, setting business goals, or simply satisfying your own curiosity. It's a great starting point to understand the key drivers of your business's worth.
• Professional valuation: For formal purposes like selling your business, seeking investment, or for legal or tax reasons, it's best to work with a professional. An accountant or business valuation expert, whose work is informed by industry data like the annual Valuation Practice Survey, can provide an objective and defensible valuation report. They have access to industry data and can navigate the complexities of different methods to give you the most accurate figure.

Industry factors that affect company value

Your company's value isn't just about your own numbers; it's also influenced by the industry you operate in.

• Industry multipliers: Different industries have different standard valuation multipliers and financial needs; for instance, a heavy machinery manufacturer might need 20-25% in working capital per dollar of sales, which influences its financial profile and value. A tech company with recurring revenue might have a higher multiplier than a retail business, for example. An accountant can help you find the right multiplier for your industry.
• Market trends: Is your industry growing, stable, or declining? A business in a growing market is generally seen as more valuable.
• Competition: The level of competition in your market can also play a role. A business with a unique product or a strong competitive advantage will often command a higher valuation.

Understanding valuation limitations

Multiple valuation methods provide different perspectives on your company's worth. Professional valuers help select appropriate methods and industry multipliers for accuracy.

DIY options:

• Book value calculations using your balance sheet
• Basic revenue or earnings estimates
• Entry-cost analysis for asset-heavy businesses

Important limitations:

• Calculated values may differ from actual sale prices
• Negotiations affect final outcomes
• Market conditions influence buyer willingness to pay

Regular valuations help track business performance and prepare for important decisions. Xero's financial reporting tools make it easy to access the balance sheet and profit data you need for basic valuations.

You can find an accountant near you in the Xero advisor directory for professional valuation services.

FAQs on company valuation

Here are answers to some of the most frequently asked questions (FAQs) about valuing a company.

What are the most common methods of valuation for a small business?

For most small businesses, the most common methods are the earnings multiplier (valuing the business based on its profit) and the asset-based valuation (valuing it based on what it owns minus what it owes). It's often best to use a combination of methods for a more complete picture.

How do I determine how much my company is worth?

You can start by using a simple formula, like subtracting your total liabilities from your total assets to find the book value. For a more forward-looking view, you can multiply your annual profit by an industry-standard multiplier. For an accurate valuation, especially for a sale, it's best to consult an accountant.

What is a good valuation multiple?

There's no single 'good' multiple, as it varies widely by industry, business size, and growth potential. For example, a stable service business might have a multiple of 2-4x earnings, while a fast-growing tech company could be much higher. An advisor can help you find the typical range for your industry.

How often should I value my business?

It's a good idea to have a rough sense of your business's value annually as part of your financial review. You should conduct a more formal valuation when you're planning to sell, seek investment, bring on a partner, or for estate planning purposes.