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The Best Valuation Methods for Determining Your Business’s Worth

Determining the best valuation for a business isn’t just about numbers—it’s about understanding both tangible and intangible value. A company’s worth extends beyond revenue, incorporating aspects such as market position, intellectual property, and even the strength of its team.

Business valuation is essential for owners looking to raise capital, sell their business, or attract investors. However, unlike publicly traded companies with transparent stock prices, privately held businesses require different valuation methods to estimate their worth.

Below, we explore the best valuation methods recommended by industry experts to help you determine how much your business is truly worth.

1. Standard Earnings Multiple Method

One of the most common ways to value a business is through an earnings multiple approach. This method assesses a company’s profitability by applying a multiple to its past three years’ average earnings.

For traditional businesses, the multiple typically ranges between 5 to 8 times the yearly profit, while SaaS and subscription-based models may command 8 to 12 times earnings due to their recurring revenue.

Additional considerations include:

• Intellectual property (e.g., patents, proprietary technology)
• Previous funding rounds and debt
• Strategic buyers (who may pay a premium for unique assets)

This method is ideal for established businesses with steady revenue streams.

2. Human Capital Plus Market Value Method

Some businesses derive most of their value from human capital—such as expertise, know-how, and innovation—rather than physical assets. This approach evaluates the skills, experience, and potential of the management team alongside the estimated market size for the business’s products or services.

This method is particularly useful for knowledge-based businesses, such as consulting firms, research-driven enterprises, and emerging technology companies.

3. 5x Your Raise Method

For businesses seeking investment, a common rule of thumb is that investors typically expect a 20-25% ownership stake in exchange for their capital. This method estimates a business’s valuation at approximately five times the amount being raised.

However, artificially inflating your valuation can cause problems when raising future funding. Overvaluation in early rounds can lead to down rounds, which may dilute ownership and negatively impact long-term growth.

4. Exit Strategy-Based Valuation

Many business owners build their companies with an exit in mind—whether through acquisition, merger, or IPO. This method determines valuation by considering:

• The target exit price
• The required ownership retention for founders
• The expected growth trajectory

By forecasting future funding rounds and potential exits, this approach helps business owners structure their equity properly and avoid losing too much control over time.

5. Discounted Cash Flow (DCF) Method

A widely accepted method for long-term business valuation, the Discounted Cash Flow (DCF) approach estimates a company’s worth based on future cash flow projections. This requires:

• Estimating total market size and expected revenue growth
• Forecasting market share acquisition
• Calculating fixed and variable costs, working capital needs, and capital expenditures
• Applying a discount rate to account for risk

DCF is particularly effective for businesses with predictable revenue streams but can be challenging for early-stage companies with uncertain cash flow.

6. Comparison Valuation Method

By comparing recent mergers, acquisitions, and private equity deals within the same industry, this approach helps businesses benchmark their valuation against competitors.

While this method is useful, it’s highly dependent on market conditions—meaning valuations can fluctuate based on trends and investor sentiment.

7. Customer-Based Corporate Valuation

This emerging method directly ties a business’s valuation to customer acquisition, retention, and monetization. By analyzing:

• Customer lifetime value (CLV)
• Customer acquisition cost (CAC)
• Retention rates

…this model provides data-driven valuation insights that better reflect a company’s growth potential.

8. Combination Approach (“Combo Platter” Method)

Many business owners and investors use a blend of valuation techniques to ensure accuracy. A combination of methods such as:

• Comparable market data (from AngelList, Pitchbook, CB Insights)
• Risk factor summation (Berkus method)
• DCF and earnings multiple cross-validation

…can create a well-rounded estimate of best valuation for a business.

9. Gross Profit x Industry Multiple

Some investors prefer to value businesses based on gross profit rather than net income, as it better reflects market penetration and business health. This method involves:

• Calculating last 12 months’ gross profit
• Finding an industry-specific valuation multiple
• Applying the multiple to determine business value

For example:
Gross Profit (Last 12 Months) x Industry Multiple = Business Valuation

10. The Best valuation Method For Me

Different industries favor different valuation methods. A retail business may be valued at 1-2 times annual earnings plus assets, whereas a high-growth technology firm might be valued based on future earnings projections.

Owners should be aware of standard valuation practices in their industry to ensure fair negotiations.

The Venture Capital Method (Bonus)

If seeking venture capital, it’s important to understand how VCs determine valuations. The Venture Capital Method estimates a business’s future exit value and works backward to determine today’s fair valuation.

This method considers:

• Future revenue potential
• Industry trends
• Exit multiples seen in recent deals

How to Choose the Best Valuation Method for Your Business

As seen above, different valuation methods apply in different scenarios. However, most approaches consider both financial and qualitative factors when assessing business worth.

One final piece of advice: valuation isn’t everything. Nathan Lustig, Managing Partner at Magma Partners, emphasizes that beyond just numbers, the right investor or buyer can add immense value through expertise, networks, and strategic partnerships.

“Obviously, valuation matters, but if you find the right partner who can help you beyond just money, think twice about choosing the highest offer. Also, always read the fine print—many term sheets contain clauses that significantly alter the impact of a valuation figure.”

When determining your best valuation, don’t just focus on the numbers—consider the human element as well. The right approach will ensure you maximize your business’s potential while maintaining long-term stability.

Speak to experts to learn more and see Commbank’s great article.