Business Valuation Methods Explained

Business valuation is the process of estimating what a business is worth based on its cash flow, risk, assets, and market comparables. In real transactions, price is usually a negotiation between a valuation range and deal terms—financing, inventory, working capital, training, lease assignment, and conditions.

This guide explains the core valuation approaches professionals use, how small businesses are commonly priced (SDE/EBITDA multiples), and the common traps that cause buyers to overpay.

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Business Valuation Snapshot

The core frameworks buyers and valuators use

Key Highlights

  • Most valuations use three approaches

  • “Earnings” must be normalized first

  • Multiples depend on risk and deal terms

  • Asset-heavy businesses price differently

  • One method rarely tells the full story

Value Types

Before you value anything, define the value concept you’re aiming for (for example, a market-based “what it would sell for” view versus a specific buyer’s investment view). The same business can produce different values depending on purpose, assumptions, and what is included in the transaction.

Income Approach

The income approach estimates value by converting future expected benefits into today’s value. In practice, this commonly appears as discounted cash flow (DCF) or capitalization methods when earnings are stable. It’s powerful for businesses where cash flow is the main driver and future performance can be reasonably modeled.

Market Approach

The market approach estimates value by comparing the business to similar companies using pricing multiples and transaction benchmarks. This is where you’ll see methods like guideline company comparisons or transaction multiples, adjusted for size, risk, growth, customer concentration, and recurring revenue quality.


Asset Approach

The asset (cost) approach focuses on what the business owns and what it owes, often using an adjusted net asset method. It’s commonly more relevant when assets drive value (equipment-heavy operations), when earnings are inconsistent, or when the business is closer to liquidation value than going-concern value.

Earnings Quality

For small businesses, reported profit is often not “valuation-ready.” Buyers typically normalize earnings to reflect the true economic benefit to an owner-operator by adjusting for owner pay, one-time expenses, and discretionary items. A common small-business metric is Seller’s Discretionary Earnings (SDE), used to standardize earnings for comparison and pricing.

Deal Structure

Valuation and purchase price are not identical. Asset sale vs. share sale, inventory treatment, working capital targets, seller financing, training/support, and lease assignment terms can move the real economics of the deal. Serious buyers pressure-test valuation by changing assumptions and confirming what is actually included at closing.

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Valuation Deep Dive

How to turn “methods” into a real pricing range buyers can trust

A practical way to value a business is to run more than one lens, then reconcile. Start by normalizing earnings (so the cash flow number is real), then apply a market multiple range to see what comparable pricing suggests, and finally sanity-check against an income approach (DCF/capitalization) when future cash flow can be forecast credibly.

Where buyers get hurt is relying on a single method with weak inputs—pro-forma earnings without proof, add-backs that aren’t legitimate, or multiples pulled from unrelated industries. The goal is not a “perfect” number; it’s a defensible range that holds up when you verify financials, lease terms, customer concentration, and operational risk.

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MOHIT DHILLON

Calgary Commercial & Business Acquisition Advisor

Mohit Dhillon

I work with investors and owner-operators across Alberta on acquisitions in industrial, retail, office/medical, and multi-unit. My focus is underwriting clarity: validating NOI, interpreting lease risk, and building a deal structure that aligns with financing reality—so buyers don’t overpay and sellers understand what the market will actually support.

FAQ's

What are the main business valuation approaches?
Most valuation frameworks group methods into three broad approaches: income, market, and asset/cost.

What’s the difference between a business valuation and the asking price?
A valuation is an estimate based on methods and assumptions; asking price is a negotiation starting point and can be influenced by deal terms and market demand.

What is SDE and why is it used for small businesses?
SDE is a common small-business earnings measure used to normalize owner benefit so buyers can compare businesses and apply pricing multiples more consistently.

What is EBITDA and when is it used?
EBITDA is often used for larger or more management-driven businesses where owner compensation and discretionary add-backs are less central than operating profitability.

When is the asset approach most relevant?
When assets (equipment, vehicles, inventory systems) drive value, earnings are unstable, or the business is closer to liquidation than a growing going concern.

Why do two similar businesses trade at different multiples?
Risk profile and quality of earnings: lease stability, customer concentration, recurring revenue, management depth, margins, and how transferable the business is.

Does goodwill affect valuation?
Yes. Goodwill reflects the value of intangible factors like brand, systems, customer relationships, and profitability beyond tangible assets.

Should I get a professional valuation?
If you need a formal valuation for financing, tax, litigation, or a high-stakes transaction, a credentialed valuator is typically appropriate.

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