How to value a business: three methods in plain words

A valuation answers one question: what price could the company be sold for on reasonable terms. There is no single “correct” number — there is a range that depends on the method, the quality of the data and how a particular buyer looks at the business.

Three classic approaches

Professional valuers use three approaches and combine the results into a final range. None of them is universal.

1. Income approach (DCF)

A business is worth the cash it will produce in the future, brought back to today’s money and adjusted for risk. It fits companies with stable profit and a clear forecast. The weak spot is that the result depends heavily on the forecast: a small error in growth or in the discount rate moves the number noticeably.

2. Market approach (multiples)

Valuation by comparison: profit or revenue is multiplied by a multiple observed in deals with similar companies. It is fast and easy for a buyer to follow. The weak spot is that you need genuinely comparable deals, and small businesses have little public data.

3. Asset approach

The value of the assets minus the liabilities. It works well for asset-heavy companies and as a floor for the rest. For service businesses it understates value: the real assets — clients, team and processes — do not show on the balance sheet.

Why the result is a range

Each approach looks at the business from a different angle, so the results differ. An honest valuation shows a range and explains the assumptions behind it. The buyer will negotiate anyway — it is better to know exactly what about.

What a buyer looks at besides the numbers

• how dependent the business is on its owner;
• how concentrated the revenue is on one or a few clients;
• the quality and transparency of the accounts;
• the share of recurring revenue and how predictable sales are;
• legal cleanliness and whether contracts can be transferred.