Business Valuation Methods Explained

Introduction

Business valuations are not one-size-fits-all. Different methods are used depending on the type of company, industry, and purpose of the valuation. Here we explain the three primary approaches in simple terms — highlighting when they apply, their strengths, and their limitations.

Income Approach

This method looks at the business’s ability to generate future earnings, which are then discounted to today’s value.

Pros

Reflects the earning potential of the business; ideal for companies with stable cash flows.

Cons

Requires reliable projections and assumptions; sensitive to changes in discount rates.

Best For

Established businesses with predictable revenues (e.g., professional practices, healthcare, or service providers).

Market Approach

This method compares your business to similar companies that have recently sold or are publicly traded.

Pros

Grounded in real market data; easy to explain to buyers and investors.

Cons

Data may not always be available, especially in niche sectors; can be influenced by short-term trends.

Best For

Industries with frequent transactions and accessible comparables (e.g., retail, technology startups).

Asset-Based Approach

This approach calculates value based on the fair market value of assets minus liabilities. It can also include intangible assets such as patents or trademarks.

Pros

Straightforward and grounded in tangible figures; good for asset-heavy businesses.

Cons

May undervalue companies with strong growth potential or intangible value.

Best For

Manufacturing, real estate, or liquidation scenarios.

Final Thoughts

The right valuation often combines multiple approaches for a balanced, defensible result. By understanding these methods, owners gain insight into how professionals assess value — and why results may vary.