Methods

How to Value a Business

The three valuation methods every advisor uses, when each one applies, and how they triangulate into a defensible number.

Updated 2026-06-04 · Ad Astra Equity

Quick answer

Three methods, used together, produce a defensible value. Comparable transactions tell you what the market actually paid. Discounted cash flow tells you what the future is worth today. Asset-based valuation sets the floor.

For most lower middle market ($5M–$200M revenue) operating businesses, the comparable-transactions method anchors the number, DCF tests it, and asset-based checks it for sanity. When two of the three methods agree closely, the third is the one to question.

1. Comparable transactions — the market anchor

The comparable-transactions method answers the question buyers actually ask: what did similar businesses sell for, recently?

To do it well:

  1. Define the comp set. Same industry vertical, similar revenue and EBITDA range, similar customer mix. A $4M EBITDA HVAC services company is not comparable to a $40M EBITDA industrial HVAC manufacturer.
  2. Pull at least 8–12 closed transactionsfrom the last 24 months. Sources: PitchBook, S&P CapitalIQ, BVR's Pratt's Stats, and proprietary advisor databases like ours.
  3. Calculate EV/EBITDA multiples for each, then report the median, the interquartile range, and the relevant outliers (PE platform deals tend to be higher than strategic-tuck-in deals).
  4. Adjust for your specifics. Smaller businesses earn lower multiples than the median. High customer concentration depresses the number. Recurring revenue, multi-year contracts, and PE-ready management earn premium.

Industry-specific bands change quarterly. Our sell-a-business directory publishes the current ranges with citations.

2. Discounted cash flow — the future-cash test

DCF projects free cash flow for a forecast period (typically 5–7 years), discounts it back to present value, and adds a terminal value for the steady state beyond the forecast window.

The mechanics:

  • Free cash flow = EBITDA − cash taxes − maintenance capex − change in working capital.
  • Discount rate (WACC) = blend of the cost of equity (using a size-adjusted CAPM for private companies, often 14–22%) and the after-tax cost of debt.
  • Terminal value = either a perpetual-growth model or an exit multiple. Sensitivity-test both.

DCF is most useful when:

  • The business is non-steady-state (launching a product, losing a major customer, ramping a new geography).
  • The comp set is thin or unrepresentative — niche industries, very large deals.
  • You are valuing a specific cashflow stream (a synergy case for a strategic acquirer, or a partner buy-out scenario).

For most owner-operated, steady-state businesses, a DCF result that diverges more than 25% from a well-built comparable-transactions analysis is almost always wrong in the DCF — usually because the discount rate or terminal multiple is mis-set.

3. Asset-based — the floor

Asset-based valuation calculates the fair market value of every asset (tangible and intangible) less every liability. For most operating businesses, this number is materially below the operating value — that gap is goodwill, and it is what buyers are actually paying for.

Asset-based is the right primary method only when:

  • The business is being liquidated or wound down (no buyer for goodwill).
  • The business is asset-heavy and undermanaged — a manufacturing operation where the real value is the land, equipment, and inventory rather than the cashflow.
  • You are valuing for a divorce, estate, or partner buy-out where the instruction specifies fair market value of assets.

In a sale-side advisory context, asset-based valuation usually shows up as a reasonableness check — a floor that confirms the operating value is correctly measured.

Putting it together: triangulation

A defensible valuation report shows all three methods, presents a range from each, and reconciles them into a recommended range — typically a 15–25% band, not a point estimate.

What good triangulation looks like in practice:

  • Two methods cluster tightly (say, comps $35M–$42M and DCF $36M–$44M).
  • The third method anchors the floor (asset-based $14M for a services business — confirming most value is goodwill, which is consistent with the operating result).
  • A reconciliation paragraph explains why the recommended range is what it is, and which factors would push you up or down inside that range.

When methods diverge by more than 30%, you have a measurement problem, not a business problem. The most common causes: stale comp data, an unrealistic growth forecast, or a buried adjustment in EBITDA.

When you need a formal valuation

Self-estimated numbers are fine for planning. A formal valuation is required when the number has legal or tax consequences:

  • 409A. Granting stock options or other equity compensation in a private company.
  • Estate and gifting. Transferring shares to family or trusts with IRS scrutiny.
  • Partner buy-outs and divorces. Settling a contested value with finality.
  • SBA financing. Lenders require an independent business valuation for many acquisition loans.

Our valuation advisory team delivers conclusion-of-value and calculation-of-value reports under USPAP and AICPA SSVS standards.

Keep reading

What is my business worth? — owner's guideThe 1-minute estimate, then the levers that move it.Lower middle market M&A — the landscapeHow $5M–$200M revenue deals actually work.Free business valuation toolIndustry-calibrated EBITDA × multiple range.Formal valuation servicesUSPAP / SSVS reports for estate, partner buyouts, options.

Sources

  1. [1] AICPA Statement on Standards for Valuation Services (SSVS) No. 1
  2. [2] Duff & Phelps Cost of Capital Navigator

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