How to Value a Business: 3 Methods Every Owner Should Know (2026)

A business is worth what a buyer will pay, and the three standard methods are attempts to predict that figure from different evidence. Earnings multiples price the profit stream, asset valuation prices what you could sell the parts for, and discounted cash flow prices the future cash the business will produce. They rarely agree, and the spread between them is itself informative.

Method One: The Earnings Multiple

This is how most small businesses actually change hands. Normalise annual earnings, then apply a multiple observed from comparable transactions in the same sector and size band. For owner-operated businesses the earnings figure is usually seller's discretionary earnings, which adds back the owner's salary and personal expenses, because a buyer will make their own decisions about those.

The multiple carries all the judgement. Sector, growth rate, customer concentration, recurring versus one-off revenue, and whether the business runs without the owner all move it, and the last of those moves it most.

Methods Two and Three: Assets and Cash Flow

Asset-based valuation totals what the assets would fetch and subtracts liabilities. It sets the floor: no rational seller accepts less than liquidation value. For a profitable business it usually understates worth badly, because it ignores the earning power that makes the assets worth owning together.

Discounted cash flow projects free cash for several years, adds a terminal value, and discounts everything back at a rate reflecting risk. It is the most theoretically sound and the most sensitive to assumptions: small changes to the growth rate or the discount rate swing the answer enormously, which is why buyers treat a seller's model with suspicion.

1. Normalise earnings first: strip one-off items, add back owner compensation and personal expenses.
2. Find comparable transactions in your sector and revenue band, not just your sector.
3. Compute all three methods and record the range rather than picking a favourite.
4. Adjust for the risks a buyer will price: customer concentration, owner dependence, lease and contract terms.
5. Get the figures reviewed by someone who has completed transactions, before you talk to a buyer.

                Business inputs
  Revenue                            $2,400,000
  Reported net profit                  $180,000
  Owner salary added back              $140,000
  One-off legal costs added back        $28,000
  Normalised earnings (SDE)            $348,000
  Equipment and inventory at market    $410,000
  Liabilities                          $165,000
Method 1: earnings multiple at 3.2x
  348,000 x 3.2                     $1,113,600
Method 2: asset-based
  410,000 - 165,000                   $245,000
Method 3: DCF, 3% growth, 18% discount
  approx.                             $980,000
Range: $245,000 floor, roughly $1.0m to $1.1m
for the going concern. The gap between the floor
and the range is the value of the business working.
              

The asset figure is not a competing answer; it is the walk-away price. The earnings and cash-flow methods bracket the negotiating range, and their closeness here is a sign the earnings are believable.

What Buyers Actually Adjust For

Buyers reprice risk, not potential. Customer concentration above roughly a quarter of revenue in one account, revenue that is project-based rather than recurring, a short remaining lease, key staff without contracts, and messy books all reduce the multiple. Cleaning up the last of those is the cheapest value gain available to most owners.

Records matter more than owners expect. The IRS requires businesses to keep records supporting the income and deductions reported on their returns, and a buyer's advisers will reconcile your normalised earnings against filed returns line by line. Adjustments you cannot document from the accounts will simply be removed from the valuation.