Business Valuation

Business Valuation Methods Explained

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Three approaches (income, market, and asset), and how appraisers reconcile them into a single defensible number.

By Harry Prabandham3 min · 5 slidesUpdated May 4, 2026

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Different purposes need different approaches. A buyout valuation differs from an estate valuation differs from a litigation valuation.
The IRS, the courts, and buyers all expect a defensible methodology, not just a number you 'feel good about.'
Three accepted approaches: Income, Market, and Asset. A proper valuation considers all three and reconciles to a final conclusion.
The credibility of a valuation comes from documentation: methodology, assumptions, comparable data, and the appraiser's qualifications.

Project free cash flow to the firm for 5–10 years, then a terminal value beyond that.
Discount everything back to present value using a weighted average cost of capital (WACC) reflecting the business's risk.
Best when: business has stable, predictable cash flows or a clear growth trajectory.
Pitfalls: garbage projections in = garbage value out. WACC selection is highly judgment-driven and dramatically impacts the result.
Capitalized cash flow (a simplified income method) is often used for stable, mature small businesses where complex projections aren't credible.

Look at recent sales of similar businesses (private transactions) and apply revenue or EBITDA multiples to your business.
Or look at publicly-traded comparables and apply their multiples (with adjustments for size, control, and liquidity).
Best when: there's a robust set of comparable data. Restaurants, dental practices, SaaS businesses, and professional services firms all have decent transaction databases.
Pitfalls: 'comparable' is rarely truly comparable. Public companies are larger and more liquid than the typical small business, so discounts apply.
Common multiples: 3–6× SDE (seller's discretionary earnings) for small owner-operated businesses; 4–8× EBITDA for larger small businesses.

Adjusted Net Asset Value: take book value and adjust assets and liabilities to fair market value.
Best when: holding companies, real-estate entities, businesses being liquidated, or businesses where intangible value is minimal.
Worst when: the business derives most of its value from goodwill, customer relationships, or earning power not reflected on the balance sheet.
Liquidation value sets the floor: what would the business fetch if sold off in pieces? Useful for distress scenarios.

An appraiser weights each approach based on relevance. For an operating business with stable cash flows: heavy on income, supportive market, and asset as floor.
Apply discounts for lack of marketability (DLOM, often 15–35%) and lack of control (DLOC, often 15–25%) when valuing minority interests in private companies.
Document everything: assumptions, comparables used, discount rates chosen, why you weighted approaches the way you did.
A valuation report should withstand IRS audit, court testimony, or buyer due diligence; that's what 'defensible' means.
Need a valuation? Rubric Financial delivers business valuations for owner buyouts, estate planning, M&A, and litigation support.

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