How to Value a Business: The Five Methods in Plain English

Why there is no single right answer

If you ask three different people to value your business, you will likely get three different numbers. That is not because someone is wrong. It is because valuation is not a single formula, it is a set of methods, each built for a different purpose, and each one leans on assumptions the person making them has to choose.

A bank valuing your business for a loan is asking a different question than a private equity buyer sizing up an acquisition, who is asking a different question than a divorce attorney trying to split marital assets. Same business, different lens, different number. Once you understand the five methods owners actually run into, the spread starts to make sense instead of feeling like a shell game.

Method 1: Multiple of earnings (the one that matters most)

This is the method almost every buyer of a small or mid-sized business actually uses. You take a normalized measure of profit, usually seller's discretionary earnings (SDE) for smaller businesses or EBITDA for larger ones, and multiply it by a factor that reflects how buyers currently price businesses like yours.

For most small businesses, that multiple lands somewhere in the 2 to 4 times SDE range. As businesses get larger, more systemized, and less dependent on the owner, multiples climb, and profit-based multiples for larger or more attractive businesses can run roughly 2.5 to 7 times depending on the sector, growth rate, and risk profile.

Who uses it: individual buyers, private equity firms, brokers pricing a listing, and lenders sizing up a deal's debt capacity. Its weakness: the multiple itself is somewhat subjective and moves with market conditions, and it depends entirely on how cleanly earnings have been normalized. A sloppy add-back list can make the whole number meaningless.

Method 2: Multiple of revenue

Instead of pricing off profit, some industries price off top-line revenue or a similar recurring metric. This shows up mainly where margins are fairly predictable across the industry, or where the real asset being bought is a client relationship or recurring fee stream rather than a pile of current-year profit.

Accounting firms commonly trade around 0.9 to 1.35 times annual revenue. Property and casualty insurance agencies often trade on a multiple of commission, roughly 2.0 to 3.5 times. Registered investment advisory (RIA) firms are frequently priced as a percentage of assets under management, typically 1.5 to 3.0 percent of AUM.

Who uses it: buyers in fee-based, recurring-revenue industries where profit margins are already well understood and fairly consistent across firms. Its weakness: revenue says nothing about how efficiently that revenue turns into cash. A high-revenue, low-margin business can be worth less than a smaller, leaner one, so this method only works when everyone agrees on what typical margins look like.

Method 3: Discounted cash flow (DCF)

DCF tries to answer the question directly: what is this business worth today based on all the cash it will generate in the future? You project future cash flows for several years, then discount them back to today's dollars using a rate that reflects risk and the time value of money.

In theory this is the most rigorous method, because it is the only one that explicitly accounts for growth, risk, and timing. In practice, it is rarely used to price small business deals because it requires confident multi-year projections, and most small businesses do not have the forecasting history or stability to support them.

Who uses it: institutional buyers, corporate finance teams, and analysts valuing larger, more predictable companies, or businesses being valued for litigation or estate purposes. Its weakness: it is extremely sensitive to its assumptions. Small changes in the growth rate or discount rate can swing the resulting value by a huge margin, which makes it easy to produce almost any answer you want.

Method 4: Asset-based and liquidation value

This method ignores earnings entirely and instead adds up what the business owns, equipment, inventory, receivables, real estate, minus what it owes. It answers a narrower question: what would this business be worth if it stopped operating tomorrow and everything was sold off?

For a profitable, ongoing business, this number is usually the floor, not the realistic price, because it ignores the value of customer relationships, trained staff, and future earnings. But for asset-heavy or struggling businesses, it can be the most relevant number in the room.

Who uses it: lenders assessing collateral, buyers of distressed or declining businesses, and courts in bankruptcy or dissolution proceedings. Its weakness: it systematically undervalues healthy, profitable businesses, since a business earning good, stable profit is worth far more as a going concern than as a pile of parts.

Method 5: Comparable transactions

This approach looks at what similar businesses in your industry, size range, and region actually sold for recently, then uses those deals to infer a range for yours. It is the same logic a real estate agent uses when pulling comps for a home sale.

The appeal is obvious: it is grounded in real market behavior rather than theory. The catch is that private business sale prices are rarely public, so the data usually comes from broker databases or industry associations with limited, self-reported, and sometimes stale deal information.

Who uses it: business brokers and appraisers as a cross-check against the multiple-of-earnings method, especially in industries with active deal flow. Its weakness: small sample sizes and inconsistent reporting mean two comps databases can show meaningfully different ranges for the exact same industry.

Why buyers of small businesses almost always land on earnings

Of the five methods, multiple of earnings wins out for one practical reason: it is the method that best answers the question a buyer actually cares about, how much cash will this business hand me each year, and how does that compare to what I am paying for it.

Revenue multiples work only in a handful of fee-based industries. DCF requires forecasting confidence most small businesses cannot support. Asset value understates a healthy business. Comparable transactions are useful as a sanity check but rarely as the primary number. Multiple of earnings sits in the middle: simple enough to calculate from your tax returns, and closely tied to the cash flow a buyer is actually purchasing.

A valuation is not an offer

A valuation is an estimate of what your business is generally worth in the current market, based on its financial performance and typical multiples for businesses like it. An offer is what one specific buyer, with their own financing, risk tolerance, strategic interest, and negotiating position, is actually willing to pay on a specific day.

Those two numbers can be close, or they can be far apart. A strategic buyer who wants your customer list might pay above the typical range. A buyer with limited financing options, or one who spots a risk in your customer concentration, might come in below it. Treat a valuation as your starting compass heading, not your final price.

Enterprise value versus what lands in your bank account

The headline valuation number you see, sometimes called enterprise value, is not the check you deposit. Several things typically stand between that number and your actual proceeds.

Debt gets paid off first: any business loans, equipment financing, or lines of credit outstanding at closing are subtracted from the price. Working capital adjustments come next: most deals require the business to be delivered with a normal level of cash, receivables, and inventory, and shortfalls reduce your check. Then taxes take a bite, often a significant one, depending on how the deal is structured as an asset sale or stock sale. Finally, transaction costs, broker fees, attorney fees, and sometimes accountant fees, come off the top. It is common for actual take-home proceeds to land meaningfully below the enterprise value headline, so build these deductions into your expectations early.

How to sanity check any valuation number

First, ask what the number is based on: which earnings figure was used, what add-backs were included, and what multiple was applied. If someone will not walk you through the math, be skeptical of the conclusion.

Second, ask how the multiple was chosen. A number pulled from a general rule of thumb for your broad industry is weaker than one grounded in recent, comparable deal activity or informed by actual buyer interest. Third, get more than one opinion. Comparing a broker's estimate against an independent range, and against what similar businesses have actually traded for, will tell you quickly whether you are looking at a realistic figure or an optimistic one.

Finally, remember that every valuation is a range, not a point. If someone hands you a single precise number with no range and no explanation, treat that as a red flag rather than a reassurance.