Business Valuation Methods Explained: Asset, Income, and Market Approaches

The most common question from business owners is also the hardest to answer: "What's my business worth?" The real answer is: it depends who's asking — and which method they're using.

The Three Valuation Approaches

Professional valuations use three frameworks. Smart buyers and sellers understand all three — and know when each applies.

1. Asset-Based Approach

What it is: The value of the company's assets minus its liabilities. Think: "If we liquidated everything today, what would be left?"

When to use: Asset-heavy businesses (manufacturing, real estate, distribution), distressed companies, or when the business doesn't generate consistent profits.

Formula: Total Assets (at fair market value) — Total Liabilities = Net Asset Value

Reality check: Most profitable small businesses are worth more than their net assets. If your business generates $500K/year in profit but only has $200K in net assets, the asset approach undervalues you dramatically.

2. Income-Based Approach (DCF and Capitalized Earnings)

What it is: The present value of future cash flows the business will generate. This is the most common approach for profitable, going-concern businesses.

Discounted Cash Flow (DCF): Projects 5 years of future cash flows and discounts them back to today's dollars using a discount rate (typically 15-25% for small businesses).

Capitalized Earnings: Takes a single year's earnings and divides by a capitalization rate. Simpler but assumes stable earnings. Common for small business: SDE × 2.5-4.0 multiple.

When to use: Most service, SaaS, and professional services businesses. Any business with predictable earnings.

3. Market-Based Approach

What it is: "What have similar businesses sold for?" Uses comparable transaction data.

When to use: When there's enough transaction data in your industry. Works well for: dental practices, insurance agencies, HVAC companies, SaaS (revenue multiples).

Data sources: DealStats, BizComps, PitchBook, broker databases. Most small business comps aren't public — your broker should have access.

Why Buyers and Sellers Never Agree on the First Number

Sellers use the income approach (future earnings) and point to growth. Buyers use the market approach (comps) and point to risk. The difference between these two numbers is the negotiation zone — and it's usually 20-40% wide.

The Scouvo Valuation Calculator

Our free calculator uses a blended approach — industry-standard multiples adjusted for your specific revenue and EBITDA. It's a starting point for pricing discussions, not a certified appraisal. Try it below.