Valuation Methods

Market Approach

Determines value by comparing the company to similar businesses that have been sold recently, using metrics like price-to-earnings or EBITDA multiples.

Best Suited For:

• Industries with active merger and acquisition markets.
• Companies with readily available comparable transaction data, such as privately held businesses “the size of publicly listed companies“

Consideration:

• Requires access to reliable and relevant market data. Oftentimes, the data is not audited, and it comes from business brokers who are known for creative ad backs, and there is little to no information regarding weighting or normalization.

Asset Approach

The net asset method (within the asset approach) alculates the company’s value by determining the difference between total assets and total liabilities, adjusted to reflect current market values. Other methods within the asset approach—such as the excess earnings method—do exist, but they are rarely applied in practice and their usefulness remains subject to debate. In real-world transactions, the asset approach is almost exclusively implemented through the net asset method.

Best Suited For:

• Particularly applicable to asset-heavy enterprises, such as holding companies and corporate entities that own real estate
• Companies facing financial distress or without earnings.

Limitation:

• Does not reflect the company’s earnings.

Income Approach

There is a long-standing and often unproductive divide in the valuation industry—between those who operate primarily in theoretical models and internal data environments, and those who engage directly in real-world transactions. These two camps rarely speak the same language.

The former tend to view valuation as an academic exercise, where predetermined formulas and idealized assumptions matter most. The latter see valuation as a negotiation tool, grounded in what buyers actually pay and sellers are willing to accept.

Those rooted in theory—and who often rely on internal software and data models to generate valuations—tend to favor the discounted cash flow (DCF) method. It’s neat, it’s mathematical, and it satisfies internal review processes. But it often ignores how unpredictable cash flows actually are, especially in closely held businesses. For these valuers, theoretical elegance often takes precedence over commercial realism.

In contrast, professionals who work on real transactions—who sit across from buyers and sellers—quickly realize that not all value is paid in cash. Sellers hoping to monetize unproven potential often walk away with promises: earn-outs, stock in other speculative ventures, or deferred payouts tied to future milestones. Sellers offering proven cash flow or tangible net assets, however, get paid in actual money.

Discount Cash Flow (Income Approach)

The discounted cash flow (DCF) method estimates a business’s value by projecting its future cash flows and then discounting them back to present value. It relies on forward-looking projections and assumes a smooth trajectory of performance, without adequately accounting for the volatility and fluctuations typical of an average small business.

 
Best Suited For:

• Silicon Valley and Wall St
• The income approach (incl the DCF) is the most widely applicable and frequently used method for valuing all businesses.

Limitation:

• Valuation results under this method hinge on the credibility of projected cash flows—which can be points of contention.

Straight Capitalization of Earnings (Income Approach)

The straight capitalization of earnings method involves normalizing and weighting historical earnings to derive a representative earnings figure for the business. This approach reflects how the vast majority of small and mid-sized businesses in the United States are actually valued and sold in practice.

Best Suited For:

• All businesses with net income
• The income approach (incl straight capitalization of earnings) is the most widely applicable and frequently used method for valuing all businesses.

Limitation:

• Valuation results under this method hinge on the relevance of historical earnings—which can be points of contention.