The valuation of a business is an important exercise when an entrepreneur plans to buy or sell his business. It becomes necessary for most small businesses to calculate the value of their business for many purposes, which include valuation of loan application, estate planning, net worth calculation, and so forth.

There are various methods for valuing business: the rule of thumb method, asset valuation or industry average valuation method.

The rule of thumb method involves a factor, or multiplier, to calculate the worth of a business. The same is projected upon a cash flow or profitability figure. The determination of the multiplier is also termed as EBIT (Earnings Before Interest and Taxes.) The profitability and cash flow of a business can also be calculated by a method called owner benefit. The method ascertains the discretionary cash flow that a business would expect in a span of one year. Discretionary cash flow determines the position of the money that would be available for paying business expenses and generating profit.

Asset valuation deals with businesses that are asset-driven for the likes of retail stores, manufacturing companies, wholesalers and the like. The valuation depends on accurately determining the value of the assets in the business. To determine the value of the business, asset valuation is added to owner benefit.

Under the industry average valuation method, a study is undertaken of the business, which is in the same industry and has been sold in the recent past. The method helps the seller to reach a ballpark figure for estimating the true worth of the business. Normally, some of the factors that can affect the comparison are location, quality of asset, entry barrier and so forth.

Businesses generally employ professionals such as advisors, brokers or chartered accountants to advise them on buying and selling businesses.