Business Valuation Methods Explained: Multiples, DCF, and Asset-Based

The main business valuation methods fall into three families: the market approach, which values a business on multiples of earnings or revenue that similar companies sold for; the income approach, which values it on the present value of its future cash flow; and the asset-based approach, which values it on the net worth of what it owns. Most credible estimates use two or three of these together and report a range, because no single method captures every business perfectly. This guide explains each method, its inputs, and when it fits.

The market approach: earnings and revenue multiples

The market approach is the most widely used method for small and mid-sized businesses because it reflects real transaction prices. You take a normalized earnings figure and multiply it by a market-derived multiple.

For owner-operated businesses, the earnings base is usually Seller's Discretionary Earnings (SDE), and typical multiples run about 2x to 4x depending on the industry. For larger companies with a management team, the base is EBITDA, and multiples commonly range from 3x to 6x for smaller firms up to 8x to 12x or more for larger, faster-growing ones. Software companies are often valued on a revenue multiple instead, such as 4x to 6x annual recurring revenue for healthy SaaS.

• Revenue multiple. Value equals revenue times a multiple. Common where profits are reinvested for growth, as in SaaS. See the revenue multiple method and when valuing a business based on revenue actually works.
• EBITDA multiple. Value equals EBITDA times a multiple. Standard for larger, management-run companies. See EBITDA multiple valuation.
• SDE multiple. Value equals SDE times a multiple. Standard for small owner-operated businesses. See SDE multiple.

Comparable sales: grounding the multiple in real deals

A close cousin of the multiple method is the comparable sales approach, which looks at what similar businesses actually sold for and adjusts for differences in size, growth, and location. This is what keeps a multiple honest. A multiple pulled from thin air is a guess; a multiple derived from recent, genuinely similar transactions is a benchmark. Strong comparables share your industry, revenue band, and profitability profile, and the estimate improves as the comp set gets tighter. Benchmarking against comparable sales is often the single most persuasive input in a valuation.

The income approach: discounted cash flow

The income approach values a business on the money it is expected to generate in the future. The dominant version is discounted cash flow (DCF), which forecasts free cash flow for several years, estimates a terminal value for everything beyond the forecast, and discounts all of it back to present value using a rate that reflects risk.

DCF has three moving parts:

• Cash flow forecast. Projected free cash flow, typically for three to five years.
• Discount rate. Often the weighted average cost of capital, or a higher rate for small, risky, owner-dependent businesses. A higher rate lowers the value.
• Terminal value. The estimated worth of the business at the end of the forecast, capturing all cash beyond it.

DCF rewards durable, growing cash flow and is favored for businesses with predictable forecasts. Its weakness is sensitivity: small changes in the discount rate or growth assumption swing the answer a lot, so it belongs in a blend rather than standing alone. The mechanics are covered in DCF valuation.

The asset-based approach: net worth of what it owns

The asset-based approach values a business as the fair market value of its assets minus its liabilities. It is most relevant for asset-heavy businesses such as manufacturers, real estate holders, or firms being wound down, where the equipment, inventory, and property carry most of the value. It is usually a poor fit for profitable service or software businesses, whose worth lies in earnings and relationships rather than physical assets. For a healthy going concern, the asset-based figure often sets a floor rather than the answer.

How the methods compare

Choosing and blending methods

The right choice depends on the business. A profitable agency is best estimated with SDE multiples and comps. A high-growth SaaS company leans on revenue multiples and DCF. A manufacturer with heavy machinery deserves an asset-based check alongside an EBITDA multiple. In practice, running two or three methods and reconciling them into a weighted range produces a more defensible estimate than any single method, and it exposes where the drivers disagree.

Estimate versus formal appraisal

Applying these methods yourself yields a solid estimate for planning, pricing, or negotiation. It is not a certified appraisal. A formal valuation for litigation, tax, estate, or lending purposes should come from a credentialed appraiser who can issue a signed, defensible report. Any self-serve output, including the figures here, is educational and should be read as a range, not a promise.

Businessappraisal runs the revenue multiple, the EBITDA or SDE multiple, and a discounted cash flow together, benchmarks the result against comparable sales, and explains which drivers moved the number. The output is an educational estimate expressed as a range, produced in minutes. See how business valuation works in detail.