At some point most businesses need to answer the question "what is it worth?" — when raising investment, bringing in or buying out a shareholder, issuing shares, or meeting a regulatory requirement. Valuation is the disciplined way of answering that, using recognised methods rather than guesswork. This article explains, in general terms, why valuation matters, the main approaches used, and the situations where a formal valuation is not optional but required.
Reviewed by CA Harika Chebolu, FCA · Last updated 2026-06-15
Quick answer
Valuation puts a defensible number on what a company or its shares are worth. Here's why it's needed, the common approaches, and where a formal valuation report becomes a compliance requirement.
A valuation gives a reasoned estimate of the worth of a business or its shares at a point in time. Founders need it when raising capital or negotiating equity; existing owners need it when someone joins or exits; and it underpins decisions on issuing or transferring shares. Beyond commercial deals, valuation appears in tax and regulatory contexts, where the price at which shares change hands or are issued can have consequences if it strays from a defensible figure. A sound valuation protects all sides by anchoring the negotiation in evidence rather than optimism.
The asset-based approach values a company by looking at its net assets — what it owns less what it owes. In its simplest form this draws on the balance sheet, adjusting book values towards realistic current values where needed. It suits asset-heavy businesses, holding companies, or situations where the business is being wound down rather than continued. Its limitation is that it tends to ignore the value of an ongoing business that earns more than the sum of its assets — brand, customer relationships and future profits — so it is often a floor rather than the full picture.
The income approach values a business by the returns it is expected to generate, on the principle that an investor pays for future cash flows, not just present assets. A common form discounts projected future cash flows back to a present value using a rate that reflects risk; another capitalises a representative level of earnings. This approach is well suited to profitable, going-concern businesses with reasonably predictable performance. Because it rests on forecasts and a discount rate, the result is sensitive to those assumptions, which is why the reasoning behind them matters as much as the final number.
The market approach looks outward, estimating value by reference to what comparable businesses or shares have sold for, or to market multiples such as a multiple of earnings or revenue. The logic is that similar businesses should trade at similar relative values. Its strength is grounding the figure in real transactions; its challenge is finding genuinely comparable companies and adjusting for differences in size, growth and risk. In practice, valuers often look at more than one approach and reconcile them, since each captures something the others miss.
Beyond negotiation, certain transactions call for a formal valuation by a qualified valuer rather than an informal estimate. Issuing or transferring shares, bringing in investment, and various regulatory filings can require a supporting valuation report so that the price used can be justified to authorities. Getting this wrong — pricing shares without proper support — can create tax or compliance exposure. Where a transaction has regulatory or tax implications, treat a defensible, professionally prepared valuation as part of the cost of doing the deal correctly rather than an afterthought.
Most often when raising investment, bringing in or buying out a shareholder, or issuing or transferring shares — and sometimes to meet a tax or regulatory requirement. A valuation anchors these decisions in evidence rather than guesswork, which protects every party in the negotiation.
It depends on the business — there is no single correct method. Asset-based valuation suits asset-heavy or winding-down businesses, the income approach suits profitable going concerns, and the market approach uses comparable transactions or multiples. Valuers often apply more than one and reconcile them, since each captures something the others miss.
When a transaction has tax or regulatory implications — such as issuing or transferring shares or bringing in investment — a formal report by a qualified valuer is often needed to justify the price used. Pricing shares without proper support can create tax or compliance exposure, so treat a defensible valuation as part of doing the deal correctly.
Raising investment, issuing shares or buying out a partner? Write to the firm and we'll help you understand what valuation approach fits and when a formal report is required.