Business Valuation: Definition & How To Calculate Business Value (2025)

Figuring out your business’s value isn’t just about crunching numbers. A business valuation shows you what your company is really worth—helpful when you’re trying to bring in investors, secure funding, or thinking about selling your business. 

It’s worth getting a valuation even if you’re not planning to sell. It helps you see what you’re doing well and where you could make your business even stronger.

In this guide, you’ll learn exactly what goes into a business valuation and find out the most common ways to see what your business is worth. 

What is a business valuation?

A business valuation measures how much your business is worth. The process involves gathering and analyzing all your business information—from your assets (tangible things your business owns, like bank accounts and equipment) to your liabilities (things you owe, like taxes, payroll, and debt).

To get an accurate picture, you’ll gather important details about your business, including: 

• Revenue and profits
• Assets and debts
• Industry trends
• Market conditions

The way you approach your valuation depends on what you need it for. For example:

• If you’re selling a high-growth startup, investors will want to know about your future earnings potential.
• If your business owns lots of equipment and property, buyers will focus more on what those assets are worth.
• If you’re looking for a loan, lenders will look closely at your cash flow history and stability.

Most valuations are done by certified business appraisal professionals, working alongside accountants, financial advisers, or specialized valuation experts. They’ll review your past financial statements, future projections, and payroll data. These experts analyze your numbers, compare your business to similar companies, and consider what makes your business unique to determine a fair value.

When do you need a business valuation?

When you’re just starting a business, you’re thinking about the basics—choosing a name, registering your company, and getting your business licenses. The last thing on your mind is what will eventually happen to it, especially if you’re starting with limited funds. But knowing your business’s value becomes important in several situations:

• When your stakeholders change: Anyone with a stake (or potential stake) in your business, like new shareholders or investors, will want to know its value.
• If you want to sell: Potential buyers or merger partners will need to understand what your business is worth.
• If you’re buying a business: Before purchasing an existing business, you’ll need to know its true value to ensure you’re making a smart investment.
• For equity compensation: If you’re offering equity packages or stock options, especially as a startup, you’ll need a valuation to price them correctly.
• For financing: Bankers and investors need to know your business’s value before offering loans or backing. Some loans don’t require a full validation and just look at your sales history instead.
• For tax purposes: The government may need to know your business’s value if ownership changes. For example, if you sell below market value, the IRS might charge a gift tax based on their valuation. You also need this for estate tax returns or gifting your business.
• For personal reasons: During events like divorce, you’ll need a valuation to fairly divide assets. If there’s disagreement about the value, attorneys might bring in an appraiser to reach a fair number. This also applies to estate planning for small business owners.

4 methods for calculating the value of your business

Calculating your business’s value involves looking at your company’s management, operations, finances, and market position. Different valuation methods focus on different aspects of your business—some look at future potential, while others consider current assets or market comparisons.

While some parts of a valuation are straightforward (like counting equipment), others are harder to measure (like your brand’s reputation). Both types matter when determining what your business is worth.

Here are the main methods you can use to value your business:

The earnings multiplier method

This is a straightforward way to estimate your business’s value based on your annual earnings and industry. The formula is:

Business Value = Annual Earnings (or Profit) x Industry Multiplier

Here’s how to use it:

1. Calculate your annual earnings (your net profit after taxes and expenses).
2. Find your industry multiplier (retail shops might be 1.5 to 2, while tech startups or global online stores could be 5 to 10).
3. Multiply these numbers together.

For example, if your business makes $100,000 in yearly profit with an industry multiplier of 3, your business might be worth $300,000. Remember, this is just a starting point—factors like your customer base, online presence, and location can change this number.

Income-based methods

These methods estimate your business’s value based on expected future earnings. They help stakeholders and investors evaluate opportunities by projecting potential income, not just current profits. There are three main approaches:

• Discounted cash flow (DCF): Projects future earnings and adjusts for factors like inflation and economic uncertainty to determine current value. This works well for newer businesses with high growth potential.
• Leveraged buyout analysis (LBO): Similar to DCF, but focuses on calculating the internal rate of return (IRR)—the profit a potential buyer can expect to earn. This helps buyers evaluate their potential return on investment.
• Capitalization of cash flow: Examines your cash flows, annual returns, and expected value to determine future profitability. Unlike DCF, this method assumes your future performance will mirror past results, making it ideal for established businesses with stable profits.

Market-based methods

Like comparing house prices in real estate, a market-based business valuation determines your business’s value by looking at similar companies that have sold in your industry. The appraiser examines recent purchases and sales, then adjusts for differences in factors like location or size. This method works especially well for fast-growing companies or those planning to sell.

Asset-based methods

This approach values your business based on what it owns. You’ll need to add up your tangible assets (equipment, property, and inventory) and intangible assets (software, licenses, patents, and intellectual property). When calculating asset value, remember to consider depreciation for items like equipment.

Asset-based valuation is particularly helpful if you’re considering closing or selling your business. There are two common calculations: liquidation value shows what you’d get by selling all assets at current market prices, while book value (or net asset value) represents your total assets minus liabilities from your balance sheet.

This method gives you and potential investors a clear picture of what you’d receive if you sold off your company’s assets. It’s especially useful for businesses with significant physical assets or valuable intellectual property.

Hiring a business valuation professional

Determining your business’s value can be complex —but you don’t have to figure it out alone. Several types of professionals can provide an objective estimate of your business’s worth:

• Certified public accountant (CPA): Many CPAs hold an additional Accredited in Business Valuation (ABV) certification, which means they’ve completed specialized training in business valuations.
• Accredited senior appraiser (ASA): These professionals have earned their designation from the American Society of Appraisers. ASAs complete extensive education requirements and must have five years of verified full-time appraisal experience.
• Chartered business valuator (CBV): For Canadian businesses, CBVs provide comprehensive business valuation services.

If you’re unsure about any part of the valuation process, don’t hesitate to ask for help. Working with an expert can help you get an accurate assessment of your business’s worth.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.