How to value a business, 8 methods

Need to get your business valued? An accurate valuation is essential in a wide range of situations, whether you’re selling the business, seeking investment or getting ready for a merger or acquisition.

In this guide, we’ll run through how to calculate a business valuation using one of 8 main industry-standard methods.

You can choose the one that best fits your needs and situation, or you can combine multiple methods to get a more comprehensive insight into the true value of your business.

Let’s start with what a business valuation is, and why you might need one.

What is a business valuation?

When boiled down to its simplest form, a business valuation is a monetary figure for the current value of your business.

It involves analysing multiple factors to estimate how much a company is worth. These include financial statements, assets, earnings, market position and future potential. Valuations may also take into account non-tangible or non-financial factors such as your business brand, customer loyalty or intellectual property (IP).

Business valuations can be used for a number of reasons, such as:

• Buying or selling a business
• Preparing for a merger
• Pitching for investment
• Securing loans or finance
• Planning for growth
• Exit or succession planning
• Tax planning
• Implementing employee share schemes
• Internal performance reviews.

As for how to do a business valuation, the method to use depends on the type and stage of the business, as well as the purpose of the valuation. It’s common for valuation methods to be combined to offer a more well-rounded picture of the company’s worth.

Business valuation methods

There are 8 commonly used methods for valuing businesses. These are:

1. Entry valuation
2. Discounted cash flow (DCF)
3. Asset valuation
4. Times revenue method
5. Price to earnings (P/E) ratio
6. Comparable analysis
7. Industry best practice
8. Precedent transaction method

We’ll look at these in more detail below, so you can start to think about which methods would be right for your needs.

1: Entry valuation

The first method you can use to value a business is called entry valuation. This estimates what it would cost to start the same business from scratch today.

You’ll need to calculate and factor in all startup expenses, such as:

• Purchasing equipment
• Acquiring licences
• Hiring staff
• Marketing (to gain a similar customer base)

An entry valuation sets a benchmark for buyers considering whether to buy an existing business or build their own. It’s especially useful when there’s limited financial history available for the business, or when assessing companies in early-stage markets.

However, it may not reflect intangible assets like brand value or customer loyalty. So it’s best used for asset-heavy businesses or startups.

2: Discounted cash flow (DCF)

A discounted cash flow valuation (DCF) involves projecting a business’s future cash flows, and then discounting them back to their present value using a chosen discount rate. The rate typically reflects the risk and cost of capital.

DCF is known as a highly analytical method for calculating value, and is ideal for businesses with predictable cash flows. It accounts for time value of money (TMV) and investment risk, making it a preferred method for investors and financial analysts.

The only potential drawback is that its accuracy depends heavily on assumptions about future growth, margins and market conditions. These can be subjective, so it may not be a suitable valuation method for unstable or early-stage businesses.

3: Asset valuation

Asset valuation focuses on a company’s balance sheet, calculating the value of its tangible and intangible assets minus its liabilities.

Tangible assets may include:

• Property
• Equipment
• Inventory

Meanwhile, intangible assets are things like copyright and patents, customer loyalty and brand reputation.

It’s a straightforward approach often used for asset-heavy businesses such as manufacturing companies, for example.

There are a few different variations, such as book value (using historical costs) and fair market value (what the assets could sell for today). While simple and objective, this method does have the potential to undervalue businesses which have a strong brand identity or recurring revenue but minimal physical assets.

It's commonly used in liquidation scenarios or for internal accounting purposes.

4: Times revenue method

The times revenue method values a business by applying a revenue multiple to its annual sales. This multiple varies by factors such as industry, growth prospects and market conditions.

For example, a software company might be valued at 3x revenue, while a retail business may receive a lower multiple.

This method is pretty simple and often used in early-stage businesses or industries with inconsistent profits.

However, it ignores profitability and cash flow, making it more of a rough estimate than a comprehensive valuation. It's perhaps best used as a supporting figure alongside other methods like Discounted Cash Flow (DCF).

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5: Price to earnings (P/E) ratio

The Price to Earnings (P/E) ratio method compares a company’s current market value to its earnings. This demonstrates how much investors are willing to pay per £1 of profit.

A higher P/E figure may indicate strong growth expectations, while a lower P/E can signal undervaluation or risk.

This method is widely used for publicly traded companies, and can also be helpful for comparing two or more similar businesses.

For it to work successfully though, the business in question must have consistent profitability - which may not suit startups or businesses with fluctuating earnings. There’s also the risk that the P/E ratio can be skewed by non-recurring gains or losses. So ideally, it should be used alongside other financial metrics.

6: Comparable analysis

Comparable analysis values a business by comparing it to similar companies in the same industry, using valuation multiples such as price to earnings ratio or enterprise value/EBITDA.

The result reflects what the market is willing to pay for similar businesses, which makes it a practical and real-time valuation method.

The challenge lies in finding truly comparable businesses, and then adjusting for differences in size, geography and growth.

The comparable analysis method is frequently used in investment banking and private equity as a benchmark. However, its accuracy depends on the availability and reliability of data from comparable firms.

7: Industry best practice

To value a business based on industry best practice, you’d need to use valuation methods and benchmarks that are standard for that specific sector.

For instance, SaaS companies may use monthly recurring revenue (MRR) multiples, while retail businesses may focus on gross margin and footfall.

This approach ensures that the valuation reflects how others in the industry are assessed, increasing credibility with investors or buyers. It often combines multiple valuation models, tailored to norms within the sector.

A potential drawback is that this method may not reflect a particular company’s unique strengths, so it should be used alongside more customised methods.

8: Precedent transaction method

The precedent transaction method of valuing a business involves analysing prices paid for similar businesses in past transactions. This provides an insight into what the market has historically valued similar companies at.

It is especially useful for mergers and acquisitions, giving a real-world benchmark for valuation.

Precedent transaction analysis typically uses metrics like EBITDA multiples, revenue multiples or price-to-book ratios from deals involving comparable firms.

While it may reflect market trends and buyer demand, this method can be skewed by factors specific to a particular deal. There’s also the fact that it requires access to detailed transaction data, which may not always be publicly available or up to date.

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After reading this, you should have a better idea of how to calculate business valuation for your company. We’ve run through the most commonly used methods, explaining what they are and what they’re best used for.

You may need to seek professional third-party advice on which method to use, or seek an independent valuation. It ultimately depends what you need the valuation for.

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Sources used for this article: N/A