Whether you’re preparing to sell your business, bring on investors, or plan for succession, one question always comes first: What is my business worth?

The answer depends on the valuation method you use. Different approaches can produce very different numbers, and each method has advantages depending on your company’s size, industry, and goals. In this post, we’ll break down the most common business valuation methods and help you understand which one may be right for you.

Why Business Valuation Matters

Business valuation isn’t just about putting a price tag on your company. It impacts:

  • Exit planning – setting a realistic asking price when selling
     
  • Financing – convincing banks or investors of your worth
     
  • Partnerships – ensuring fairness in buy-ins or buy-outs
     
  • Wealth planning – understanding your largest personal asset
     

The Three Main Business Valuation Methods

1. Asset-Based Valuation

How it works:
This method calculates the value of a business by adding up the fair market value of assets (equipment, inventory, property, etc.) and subtracting liabilities.

Best for:

  • Companies with significant tangible assets
     
  • Businesses with little or no earnings (e.g., startups or distressed companies)
     

Limitations:

  • Doesn’t account for future earnings potential
     
  • May undervalue businesses built on intellectual property, brand reputation, or recurring revenue
     

2. Income Approach (Cash Flow Based)

How it works:
This method estimates value based on future cash flows, discounted back to their present value (commonly called Discounted Cash Flow, or DCF). Another variation is using capitalization of earnings to project sustainable profits.

Best for:

  • Stable businesses with predictable cash flow
     
  • Companies where future earnings potential drives value
     

Limitations:

  • Requires accurate financial forecasting
     
  • Sensitive to assumptions (growth rate, discount rate, risk factors)
     

3. Market Approach (Comparables)

How it works:
This method looks at similar businesses that have recently sold, using multiples of earnings (like EBITDA or SDE) to estimate value.

Best for:

  • Industries with active markets and available comparable sales data
     
  • Owners who want to understand how buyers view similar companies
     

Limitations:

  • Reliable data can be hard to find
     
  • Doesn’t reflect unique strengths or weaknesses of your business
     

Which Method Is Right for You?

The best valuation method depends on:

  • Business size – Smaller companies often use SDE multiples, while larger firms rely on EBITDA.
     
  • Industry norms – Tech companies lean on income and growth forecasts; manufacturing may favor assets and EBITDA multiples.
     
  • Your purpose – Selling, financing, or succession planning may call for different approaches.
     

Most professional valuations use a blend of methods to capture a full picture of value.

How to Increase Your Valuation Regardless of Method

  • Diversify revenue streams
     
  • Document operations and reduce owner dependency
     
  • Improve profit margins
     
  • Strengthen management teams
     
  • Keep clean and transparent financial records
     

No single valuation method fits every business. The right approach depends on your industry, goals, and financial situation. By understanding the differences between asset-based, income, and market approaches, you’ll be better prepared to negotiate with buyers, lenders, or investors.

Want to know which valuation method fits your business best? Exit Factor provides professional valuations and strategic guidance to help you plan your next move with confidence. Learn more with our business valuation calculator.