Business Valuation Methods

19, October 2026

What is your business worth? Revenue won’t tell you. Neither will the money and years you’ve put into building it.

A buyer will look at sustainable profit. An investor in a start-up will look at likely future cash flow. In an asset-heavy business, property and equipment may carry more weight. Each is a different lens, which is why different business valuation methods can produce different answers.

This guide explains some of the main around concepts business valuation methods used, when each one fits, and what matters beyond the calculation. Obviously, it doesn’t cover everything, instead aiming to give a ‘broad brushstrokes’ understanding of the topic at hand.

What Is a Business Valuation?

A business valuation assesses what a business, or an ownership interest in it, is worth at a specific date. It should consider financial performance, future prospects, assets, risks, and market evidence. It is not the same as the value of the company or shares in that company.

Purpose shapes the answer. A business valuation for a sale asks a different question from one prepared for a shareholder buyout. So before picking a method, be clear on what is being valued, why, and as at what date.

A business valuation is an informed estimate, not a guaranteed sale price. The evidence and reasoning behind the number matter as much as the number itself.

The Three Main Business Valuation Approaches

Business valuation methods sit within three broad approaches.

Income approach. This looks at the earnings or cash flow the business is expected to generate. It covers capitalisation of future maintainable earnings and discounted cash flow.

Market approach. This compares the business with others that have sold. It is only as good as the transactions you can find, and how well you understand what each sale included.

Asset (cost) approach. This looks at the value of the assets once liabilities are taken into account. It matters most when assets make up much of the business’s value.

Each approach views the business from a different angle, and a valuer will often consider more than one before reaching a conclusion.

What Information Do You Need for a Business Valuation?

A good business valuation starts with understanding the business, not choosing a formula. Information commonly reviewed includes:

Financial records: What do historical revenue, profit and cash flow show?

Unusual transactions: Are one-off costs or gains distorting reported earnings?

Assets and liabilities: What does the business own and owe?

Customers and contracts: How secure is future income?

People and operations: How much does the business rely on the owner or key staff?

Forecasts: Are future expectations backed by evidence?

Gaps in the information make the conclusion harder to support. For Australian tax-related market valuations, the ATO expects the assessment to be objective and backed by appropriate evidence.

Capitalisation of Future Maintainable Earnings

This business valuation method is an income approach method and estimates enterprise value from the earnings a business can reasonably keep generating. In our experience, it is the method most often applied to small businesses.

What are future maintainable earnings? They are not necessarily the profit in the latest profit and loss statement. A valuer tests whether that figure reflects normal, ongoing performance. A genuine one-off expense may have pulled profit down; an unusual gain may have pushed it up. Every adjustment needs a sound reason, with the goal being a realistic estimate of ongoing earnings, not the highest one.

How it works. In simple terms:

Indicative value = Future maintainable earnings / Capitalisation Rate. The capitalisation rate is essentially the relative risk associated with the business as an investment when compared to all other investment types. It is expressed as a percentage, where the percentage is the expected rate of return that the business ought to be capable of into the future. For example, a 25% capitalisation rate indicates that the business ought to be capable of returning a 25% return on investment into the future. Which is simply another way of saying that the business is worth 4x its estimated future income. So a capitalisation rate is basically an inverse multiple…

The multiple reflects risk, growth prospects and the strength of the earnings. It should rest on relevant evidence, not a generic industry rule of thumb.

Example. Hypothetically, if maintainable EBIT is $300,000 and an appropriate risk based capitalisation rate is 25%, the indicative value is $300,000 / 0.25 = $1,200,000. That figure still needs to be read considering which underlying business assets are included in this value.

Discounted Cash Flow (DCF) Method

The discounted cash flow (DCF) method is another Income Approach method which estimates future cash flows and converts them to a value in today’s dollars. It earns its place when future performance is expected to look quite different from the past, or where the majority of income is very predictable.

How DCF works. A DCF model typically includes:

Forecast cash flows over a set period

A discount rate reflecting timing and risk

A terminal value for cash flows beyond that period

The forecast must allow for the costs and investment needed to produce the cash, not just projected sales.

When DCF is useful. It helps when a business is in start-up phase, entering a new growth phase, or making a major investment that makes historical earnings a poor guide to the future.

Limitations. Small changes to growth forecasts, the discount rate or the terminal value can move the result a long way. The calculation is only as good as the assumptions that underpin the forecasts and discounts adopted.

Comparable Sales (Market Approach)

Comparable sales analysis looks at prices paid for other businesses and asks what those deals say about the business being valued. It is generally considered a Market Approach method and is functionally very similar to a Capitalisation of Future Maintainable Earnings. Future maintainable earnings tell you which earnings are sustainable; the multiple turns those earnings into an indicative value and are based upon comparable sales information for similar businesses in the industry.

EBIT and EBITDA multiples. The two most common earnings measures are:

EBIT: earnings before interest and tax.

EBITDA: earnings before interest, tax, depreciation, and amortisation.

The measure and the multiple must match: an EBIT multiple goes with EBIT, not EBITDA. EBITDA is handy for comparing operating results, but it hides how much the business must spend to maintain its assets. It is, however, the primary measure of earnings used around the world when considering business values.

What determines the multiple? Two businesses with the same profit can be valued differently because their risks differ. Buyers look at:

Reliance on the owner or a major customer

Consistency of earnings

Growth prospects

Management and systems

Investment needed to keep operating

$400,000 of EBITDA at 3 times provides a business value of $1.2 million; at 4 times it is $1.6 million. The maths is simple. Justifying the multiple is where the work is.

What makes a good comparable? Similarity where a buyer would care: size, profitability, growth, customer mix and owner involvement. Sharing an industry is not enough if the risks are very different.

Asking prices vs actual sale prices. An asking price is what a seller hopes to get. A completed sale is what a buyer actually paid. Even then, check what the price covered. A price that includes property or surplus cash can’t be compared directly with one that doesn’t.

Asset-Based Business Valuation

An asset-based business valuation looks at the value of the assets that are required to operate the trading enterprise. Generally, it does not include any liabilities and it is useful when other when other income and market methods indicate that there is no goodwill present.

Adjusted net asset value. This goes beyond the book figures. Property, equipment, or stock may be worth more or less than what is shown in the balance sheet of the entity, so recorded values should be scrutinised and amended to reflect the current fair market value of the underlying assets.

When it fits. Asset-based business valuation methods suit property-holding or investment entities, and businesses with no goodwill. For a reasonably profitable trading business, the assets alone rarely capture the value of its ongoing earnings.

Liquidation Value

Liquidation value estimates what would be realised if the business stopped trading and sold its assets, ordinarily at ‘fire sale’ values.

It answers a different question from the value of a going concern. Customer relationships and future earnings are worth something to a buyer of a trading business, but they rarely survive a closure.

Rule of Thumb Methods

There are various industries and subindustries that have developed their own ‘Rule of Thumb’ for valuation over the years and are often used as a basis for transactions between industry participants. However, they ought to be avoided unless you truly understand the industry. They tend to ignore profitability and risk in the same sense as other earnings and market approach valuations.

How Do You Choose the Right Business Valuation Method?

The right business valuation method depends on the business, the purpose of the valuation and the evidence available.

Business situation	Method worth considering
Established, sustainable earnings	Future maintainable earnings
Cash flows expected to change significantly	Discounted cash flow
Relevant completed sales available	Comparable sales
Assets make up much of the value	Asset-based valuation
Business is being wound down	Liquidation value

Treat this as a guide, not a rule. A valuer may use more than one approach and should explain why the results differ rather than simply averaging them.

What Factors Affect Business Value?

No formula captures every strength or risk. The factors that move a business valuation most include:

Earnings quality: Are the profits likely to continue?

Customer concentration: Would losing one customer hurt income materially?

Owner dependence: Can the business run without the current owner?

People and systems: Is key knowledge shared, or held by one or two people?

Investment needs: What spending is needed to maintain performance?

Growth prospects: Is growth backed by evidence?

These factors explain why some businesses can be worth much more than others that have very similar revenue or profi

Business Valuation Example: A Sydney Business

Take a hypothetical Sydney business with reported EBIT of $250,000, after a genuinely non-recurring expense of $50,000.

If that adjustment holds up (and assuming no other adjustments), maintainable EBIT is $300,000. At an illustrative multiple of 3, the indicative value is $900,000.

Before relying on that figure, a valuer would test the adjustment, the business’s risks and whether market evidence supports the multiple. The reasoning behind the inputs matters as much as the arithmetic.

Enterprise Value vs Equity Value

Enterprise value is broadly the value of the operating business before considering how it is financed. Equity value is what belongs to the owners after debt and cash are accounted for.

In simple terms:

Equity value = Enterprise value − Debt + Cash

If enterprise value is $900,000, debt is $200,000 and cash is $50,000, equity value is $750,000. A real transaction may need further adjustments, so always check what a quoted business valuation includes.

Why Do Business Valuation Methods Produce Different Values?

Each method looks at different evidence. Earnings methods focus on sustainable profit, DCF on future cash flow, market methods on completed deals, and asset methods on what the business owns and owes.

Assumptions about risk and future performance also drive differences. A sound business valuation explains those differences and why its conclusion makes sense.

How Often Should You Get a Business Valuation?

There is no set schedule. A business valuation speaks to a specific date, so it ages as the business changes.

A fresh business valuation is worth getting before a sale or change of ownership, or after a material shift in earnings, customers, assets or structure.

Can I Value My Business Myself?

You can make a rough estimate by reviewing your earnings, assets, and comparable sales. The hard part is judging your own assumptions objectively. Is that expense really one-off? Is the forecast achievable? Is that other business genuinely comparable? What would a potential purchaser think about how risky this particular business is? When a business valuation must support a major transaction, a tax matter, or even exit planning, the evidence behind it becomes critical.

When Should You Get a Professional Business Valuation?

Get a professional business valuation when other people need to understand or rely on the conclusion, such as in a sale, a shareholder transaction or a dispute. But really consider one when you need an objective third party to look at your business so that you can better plan for the future.

A good report sets out what was valued, the valuation date, the methods considered, the key assumptions and the reasoning behind the result.

FAQs About Business Valuation Methods

What is the most common way to value a small business in Australia? No single method suits every small business. In our work, capitalised future maintainable earnings, comparable sales, and net tangible assets are the methods most often applied, but the right choice depends on the business.

Is EBITDA the same as cash flow? No. EBITDA is an earnings measure. Cash flow also reflects working capital movements and the spending needed to maintain or grow the business.

Is DCF better than an earnings multiple? Not necessarily. DCF depends on forecasts, while an earnings multiple works well where earnings are sustainable and relevant market evidence exists. Very few small to medium enterprises possess quality cashflow forecasts.

Can I value a business using revenue alone? Revenue gives a comparison point, but it says nothing about profit or cash flow. It should never be the only factor.

Does a business valuation guarantee the price I will receive? No. A business valuation is an assessment at a specific date, based on the evidence available. The final sale price also depends on the buyer, the terms, and the negotiation.

Understand What Your Business Could Be Worth

The best business valuation methods are the ones that fit the business and the decision in front of you. A credible result rests on reliable information, accounts for the real risks and explains the judgement behind the number.

Whether you’re preparing to sell, reviewing ownership or planning ahead, knowing how value is assessed puts you in a stronger position. At Business Valuations Online, we focus on making business valuation findings clear for small and medium business owners, so you can use them to make your next decision with confidence.