How to Value a Business

Whether you're a growing start-up or a well-established business, knowing your company's worth is a must. You’ll need it whether you're thinking about selling, raising capital, merging, or planning for the future.

In this guide, we’ll walk you through what a company valuation is, why getting it right is so important, and the different methods you can use to calculate your market worth.

What is a business valuation?

A business valuation is a way to figure out how much your business is worth. This is helpful for many reasons. It can:

Attract investors
Help you get loans
Help you set a fair price if you’re selling your business.

Valuation isn’t just about numbers - it shows your business’ potential for growth and success.

11 ways to value a business

There are different ways to figure out the market value of a company, each with its own strengths and weaknesses.

1. Market capitalisation

This method is simple for publicly traded companies. Multiply the company’s stock price by the total number of shares. This gives you the market cap, or total value.

It provides a quick overview but doesn’t work for private businesses that don’t trade shares publicly.

2. Earnings multipliers

This approach evaluates your business based on profits. Multiply your earnings by a number (called a multiple) that’s common for your industry.

For instance, a tech business might use a higher multiple than a manufacturing firm. This method reflects how much buyers are willing to pay for each pound of earnings.

3. Net Asset Value (NAV)

NAV adds up all the tangible assets your business owns, like property and equipment, and subtracts any debts.

This works well for businesses with significant physical assets, such as construction or manufacturing companies. It’s a straightforward way to assess the value of what you own.

4. Discounted Cash Flow (DCF)

DCF looks at the money your business is expected to make in the future. These cash flows are adjusted to today’s value using a specific rate, called the discount rate.

This method is great for businesses with strong growth potential, like startups, because it focuses on future earnings rather than current profits.

5. Comparable Company Analysis (CCA)

This method compares your business to similar companies in the same industry. By analysing how competitors are valued, you can estimate your business’s market price.

For example, if a similar company sold for three times its annual revenue, you might use that as a benchmark. This approach helps ensure your valuation is realistic.

6. Precedent transactions

This approach uses recent sales of similar businesses to determine value. It shows what buyers have been willing to pay in the current market.

For instance, if a nearby coffee shop sold for £500,000, you could use that as a guide for valuing your own shop. It’s especially useful for businesses in niche markets where data is limited.

7. Entry valuation

Entry valuation estimates the cost of starting a similar business from scratch. It includes expenses like equipment, inventory, licenses, and marketing.

This method provides insight into how much a buyer would save by purchasing an existing business instead of building one. For example, if starting a bakery from scratch costs £150,000, but your existing bakery is valued at £120,000, buyers might see it as a good deal.

8. Asset valuation

Asset valuation focuses solely on your business’s assets. These include both tangible assets, like buildings and vehicles, and intangible assets, like patents and trademarks.

By listing all assets and subtracting liabilities, you get a clear view of your business’s net worth. This method works well for businesses with significant physical or intellectual property assets.

9. Times revenue method

The times revenue method multiplies your annual revenue by a specific factor to estimate your business’s value. The factor depends on your industry and market conditions.

For example, a software company might use a revenue multiple of 3, while a retail store might use 1. This method is simple and effective for businesses with stable and predictable income.

10. Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio compares a company’s stock price to its earnings per share. It’s commonly used for publicly traded companies. A higher P/E ratio suggests that investors expect higher future growth.

While this method is less applicable to private companies, it provides useful insights for businesses planning to go public or attract large investors.

11. Industry best practices

Every industry has its own best practices for valuation. For example, tech startups often rely on DCF or earnings multipliers, while retail businesses may prefer NAV or comparable analysis.

By learning how businesses in your industry are usually valued, you can set a fair price that attracts the right buyers or investors. This knowledge helps you stay competitive and meet market expectations.

Factors that affect business value

Several things can influence how much your business is worth:

Tangible assets. These are physical things like buildings, equipment, or inventory.
Intangible assets. These include things like your brand’s reputation, patents, or customer loyalty.
Financial performance. Consistent revenue, healthy profit margins, and steady cash flow boost your business’s value.
Market conditions. Trends in your industry and the overall economy can impact valuation.
Growth potential. The more room your business has to grow, the higher its value.

How to value a business

Here’s an easy way to figure out your business’s value:

1. Collect financial documents

Gather your most recent balance sheets, income statements, and cash flow reports. These records show your assets, debts, and how well your business generates and uses cash.

For example, a balance sheet lists what you own and owe, while cash flow statements reveal if your business earns enough to cover expenses. Accurate and organised documents are essential for trustworthy results.

2. Pick a valuation method

Choose a method that fits your business.

For example, if your business owns a lot of physical assets, like a factory, the Net Asset Value (NAV) method works well.

If your business is growing fast, like a tech company, the Discounted Cash Flow (DCF) method might be better.

Pick the method that best matches your business type and goals.

3. Study the market

Research how similar businesses in your industry are valued. Check recent sales, competitor data, and industry trends.

For example, if you run a small bakery, look at what similar bakeries are selling for.

This helps you understand where your business fits in the market and sets realistic expectations.

4. Calculate your earnings

Look at past and expected future earnings to see how profitable your business is. Check for patterns like seasonal changes or steady growth. Include both your net income (profit after expenses) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).

This gives a full picture of your earning power, which is important for methods like Earnings Multiples and DCF.

5. Apply the method

Once you’ve picked a valuation model, use your financial data to calculate your business’s value.

For example, if using Earnings Multiples, multiply your yearly profit by the standard multiple for your industry. If using DCF, estimate your cash flows for the next few years and discount them to today’s value. Double-check your figures to make sure they’re correct.

6. Seek expert advice

While you can handle basic valuations yourself, it’s wise to get help from a financial advisor or valuation expert.

These professionals can fine-tune your calculations and consider factors you might miss. Their unbiased opinion is especially helpful when sharing your valuation with investors or potential buyers.

Making business valuation easier

Valuing your business doesn’t have to be overwhelming. Here are some tips to make the process smoother:

Keep your records organised. Up-to-date financial records make it easier to calculate value.
Understand your industry. Knowing common valuation practices in your industry can save time.
Use online tools. There are many tools and calculators that can help you estimate how much your company is worth.
Think long-term. A valuation isn’t just about today’s numbers; it should consider your future growth too.

Why business valuation matters

Business valuation is not just for big companies - SMEs can benefit too. Knowing your business’ value helps you:

Plan for growth by finding areas to improve and make smarter investments.
Attract investors by showing your business is worth their time and money.
Prepare for a sale by setting a fair price.
Secure funding, as lenders are more likely to approve loans if they see your business has solid value.

Common mistakes to avoid

Valuing your business can be tricky, and it's easy to make mistakes along the way. Here are a few common ones to watch out for:

Ignoring intangible assets. Don’t overlook things like your brand reputation or customer loyalty.
Relying on just one method. Using multiple methods gives a more complete picture.
Not updating your valuation. Regular updates are key, as your business value can change over time.
Overestimating growth. Be realistic about future growth and market conditions.

Getting professional help

While DIY valuation methods are useful, hiring a professional can ensure greater accuracy. Business valuation experts understand market trends, financial metrics, and industry-specific factors that might be overlooked. They can also provide insights that help improve your business’s value over time.

Professional valuations are especially important if you’re seeking significant investment, preparing for a merger, or dealing with complex financial situations. Working with an expert can also boost credibility when presenting your valuation to potential investors or buyers.

Knowing how to value your business is essential, whether you’re planning to grow, sell, or secure funding. By using the right methods and considering key factors, you can get an accurate picture of your business’ worth, which not only helps with immediate goals but also prepares you for opportunities and challenges in the future.