There is no right way or wrong way of doing this and ultimately it will depend upon what a willing buyer is prepared to pay for the business and what a willing seller is prepared to sell the business for. I always advise guidance be sought from an accountant or business valuation specialist. Some of the common valuation methods used across the board includes the following:
If the business has assets and a determined value for them, then this, subject to any adjustments in current values, is a useful starting point. With tangible assets such as plant, premises, machinery this is relatively straightforward. Problems arise when we look at intangible assets such as intellectual property rights, good will etc as the value placed on them is open to debate.
Is there an industry norm? If this is the case then the industry the business is in would dictate the terms- which would be subject to negotiation.
The cost to enter the market and compete with you. For example if we are looking at an online estate agency, how easy is it to enter in to this industry and much would it cost to set up a website with a suitable backend database facility and search engine optimisation to compete? Once established how many staff are required to run it, are physical premises required, how would you market it? If the cost is little then the only real benefit to a buyer is that they come to market that much earlier if they buy from you as opposed to having to wait for their website to be built and then marketed. In addition they would get a business that was already up and running. The value of the business in these circumstances is arguable little.
A multiplier based on profits generated is often used. A lower weighting is given on past/ historic performance compared to current performance and equally a weighting is given to the future scope for the business.
Valuation can also be based on cash flow. Future cash flows can be projected and discounted (discounted cash flow). Short- term cash flow is given more weighting/ value than any long-term cash flow.