When you’re looking to sell your business, raise capital, or bring in new partners, one of the first questions that comes up is:
“So, what’s my business worth?”
It’s a fair question, but also a tricky one. The truth is, there’s no single “right” number. A business’ value can vary depending on who’s asking, why they’re asking, and even when they’re asking.
Business valuation is often described as part art, part science. The science comes from hard data: financial statements, accounting principles, and market analysis. The art comes from expert judgment: knowing how to interpret that data in the context of the industry, the buyer and seller’s goals, and the overall market climate.
A proper business valuation isn’t just about slapping a price tag on a company. It’s about understanding what really drives value and using the right tools to arrive at a number that makes sense and that both sides can stand behind.
In this article, we’ll walk through the three most common valuation methods you’ll see in mergers and acquisitions (M&A), each with their own strengths and weaknesses:
3 Business Valuation Methods Used to Assess A Company’s Value
1. Asset-Based Valuation
This method starts by reviewing the company’s balance sheet. You total up the fair market value of all assets (equipment, inventory, property, cash) and then subtract the liabilities (things like loans, taxes owed, or accounts payable).
This approach works best for asset-heavy businesses such as manufacturers, construction firms, or companies that hold real estate. It’s also the go-to method for businesses that are being wound down or liquidated.
Pros:
- Simple and straightforward
- Based on tangible numbers
- Makes sense if assets are the main driver of value
Cons:
- Ignores intangible assets like brand reputation, customer loyalty, or intellectual property
- Doesn’t reflect the company’s ability to generate future profits
- Often undervalues service-based or high-margin businesses
In practice, an asset-based valuation usually sets the floor, but it rarely tells the whole story.
2. Market-Based Valuation
Market-based valuations start by looking at what similar companies have sold for recently. It’s the same concept as real estate agents using recent home sales to price a house. Brokers and appraisers look for “comparables” (or “comps”), which are transactions involving similar companies in the same industry.
This approach works well when reliable data exists, especially in sectors with a steady flow of M&A transactions like medical practices, small retail, or professional services.
Pros:
- Grounded in real-world deals
- Shows what buyers are actually paying
- Easy for both sides to grasp
Cons:
- Quality data for private companies or certain industries can be hard to come by
- Every business is unique. Differences in size, location, and operations can make apples-to-apples comparisons tough
- Market conditions shift, so past sales don’t always predict today’s value
Think of market-based valuation as taking the market’s pulse. It won’t give you the full picture, but it does set realistic pricing expectations.
3. Income-Based Valuation
This method looks forward rather than backward. Instead of focusing on what the business owns or makes today, it emphasizes the income it’s expected to generate in the future. There are two main techniques:
- Capitalization of Earnings
Take a single measure of earnings (often EBITDA or seller’s discretionary earnings), and apply a capitalization rate or multiple to estimate value.
- Discounted Cash Flow (DCF)
Project the company’s future cash flows over several years and then discount them back to today’s dollars, using a rate that reflects the risk of achieving those cash flows.
Income-based valuations are common for businesses with predictable income, like subscription models, professional services, or established companies with steady earnings.
Pros:
- Zeroes in on profitability, which buyers care most about
- Can capture intangible value that asset-based methods miss
- Flexible enough to account for growth, risks, and market changes
Cons:
- Requires detailed and reliable financial projections
- Very sensitive to assumptions (a small tweak in growth or discount rate can greatly swing the value)
- Can be unrealistic if projections aren’t grounded
For many buyers, income-based valuation is the most persuasive because it answers the question: “If I buy this business, how much money will it make me?”
The Hybrid Approach – A Reality in Most Deals
While it’s useful to understand the different valuation methods individually, the truth is that most deals end up blending them together, rather than relying on just one.
A broker or appraiser might:
- Use an income-based method to capture earnings potential
- Cross-check that number with market comps to see if it makes sense
- Evaluate asset value to establish a baseline
By triangulating these different methods, you end up with a fair, defendable valuation range that works for both buyer and seller.
A Practical Example
Imagine a small manufacturing company with:
- $500,000 in adjusted EBITDA
- $1,000,000 in net assets
- Comparable businesses selling for 4-5x EBITDA
The valuations might look like this:
- Asset-based: $1,000,000
- Income-based (4.5x EBITDA): $2,250,000
- Market comps: $2.0M-$2.5M
Taking all 3 valuations into account, a fair range would likely land between $2.0M – $2.25M, with the final number negotiated by growth prospects, buyer fit, etc.
Business valuation may seem like it’s based solely on cold, hard numbers, but at its heart it’s about fairness and practicality. Sellers want to be rewarded for their hard work, and buyers want confidence that they’re making a smart investment.
For most business owners, working with an experienced advisor is the best way to balance the numbers with the market reality. A well-prepared, fair valuation is the foundation for a successful deal, and it can be the difference between a smooth sale and a business that lingers on the market.
Looking to sell your business? Working with a team of seasoned professionals will help you improve the sellability of your business before you put it on the market. Give us a call at (833) 609-0388 or get in touch with us online today to get started.