Business Valuation
The process of determining the economic value of a business, typically using methods based on earnings multiples, asset values, or discounted cash flows.
What is a Business Valuation?
A business valuation is an analysis that estimates what a company is worth. For owners preparing to sell, it establishes a defensible asking price and sets expectations for the negotiation. Valuations can be performed by business brokers, certified valuation analysts, or M&A advisors.
The valuation is not a fixed number. It represents a range based on financial performance, market conditions, and the specific buyer pool for your type of business.
Common Valuation Methods
Earnings Multiple (Market Approach)
The most common method for small and mid-market businesses. The appraiser takes your EBITDA or SDE and applies an industry-specific multiple.
Business Value = Earnings x Multiple
Multiples vary widely by industry, size, and quality. A professional services firm might sell at 3x to 5x EBITDA, while a SaaS company with recurring revenue could command 8x to 15x.
Discounted Cash Flow (DCF)
Projects future cash flows and discounts them back to present value using a required rate of return. DCF is more common in larger transactions and is sensitive to assumptions about growth rates and discount rates. It is less frequently used for businesses under $10M in revenue.
Asset-Based Valuation
Calculates the net value of tangible and intangible assets minus liabilities. This method is most relevant for asset-heavy businesses (manufacturing, real estate) or companies being valued for liquidation rather than ongoing operations.
What Drives Valuation Higher
Several factors push valuations to the higher end of the range:
- Recurring revenue — subscriptions, contracts, and retainers reduce risk for buyers
- Low owner dependence — businesses that run without the founder are more transferable
- Diversified customer base — low customer concentration reduces revenue risk
- Growth trajectory — consistent year-over-year revenue and profit growth
- Clean financials — well-documented books with a quality of earnings report
What Drives Valuation Lower
- Heavy reliance on the owner for sales, operations, or key relationships
- Declining or flat revenue trends
- Single customer representing more than 20% of revenue
- Undocumented processes and informal financial records
- Industry headwinds or regulatory risk
Formal vs. Informal Valuations
A formal valuation (also called a certified business appraisal) is conducted by an accredited appraiser and produces a detailed report. This is required for tax, legal, or estate planning purposes.
An informal valuation or broker opinion of value (BOV) is a market-based estimate used to set an asking price. It is less rigorous and less expensive but sufficient for most sale processes.
When to Get a Valuation
Get a valuation at least 12 to 24 months before you plan to sell. This gives you time to address weaknesses — such as owner dependence or customer concentration — and improve your numbers before going to market.