3 Common Business Valuation Methods Entrepreneurs Should Understand

Determining the value of a business is a complex process with significant implications. Whether an owner is preparing for a sale, seeking debt or equity financing, or planning to bring on additional shareholders, an accurate business valuation is essential. Investors and other stakeholders rely on a clear, objective understanding of a company’s value to make informed decisions.

A business’s worth is influenced by a range of financial, operational, and market factors. Because of this complexity, valuations require careful analysis and professional judgment. To ensure assets are properly assessed and value is presented credibly, particularly in a transaction or financing context, business owners are best served by engaging an independent professional rather than attempting to value the business themselves.

This is where experienced valuation support can provide clarity, credibility, and confidence throughout the process.

3 Common Business Valuation Methods Explained

A business valuator, or anyone else who evaluates your business, such as a professional accountant, will use several valuation methods to determine the realistic and fair price for your business.

Here are the three basic valuation methods that are typically used:

The asset-based approach of business valuation totals up a company’s investments. This option is best for owners who treat their business as an investment rather than as a significant source of income. It's a very straightforward approach and follows a simple rule: a company is worth the sum of its parts.

Asset-based business valuations can be done two ways, as a going concern or a liquidation basis.

• A going concern approach subtracts the value of a business’s liabilities from its net balance sheet value.
• A liquidation approach determines the net cash that may be received after selling all assets and paying all liabilities.

2. Earning Value Method

The earning value method is based on the idea that a business's real value lies exclusively in its ability to create wealth in the future. The most-used earning value method for evaluating businesses is Capitalizing Past Earning.

With this method, the validator determines an expected level of future cash flow for the business using the company's record of past earnings, then normalizes them for out-of-the-ordinary expenses or unusual revenue and multiplies the expected cash flow by a capitalization factor.

Discounted Future Earnings is another earning value approach to business valuation. Instead of an average of past earnings, the validator uses an average value of the trend of predicted future earnings and divides it by the capitalization factor.

3. Market Value Method

The market value method establishes the value of a company by comparing it to other similar companies from the same industry that have sold recently. This method is not used unless there are a sufficient number of similar businesses for comparison.

The market value method is particularly difficult for sole proprietorships, which are individually owned. Trying to find public information on prior sales of related businesses is far from an easy task.

Is It Time to Consider a Business Valuation?

While the earning value method is commonly used, a single approach rarely tells the full story. In our experience, the most reliable valuations consider multiple methods to reflect a business’s financial performance, market position, and long-term potential.

Too often, business owners delay valuation planning until a transaction or financing opportunity is already underway. At that point, limited preparation can create unnecessary pressure and uncertainty around value.

At MGA, we help business owners approach valuation proactively by providing objective analysis and thoughtful guidance tailored to their goals. Our advisory and consulting services are designed to reduce complexity, improve clarity, and support confident decision-making.

If you’re considering a sale, expansion, or ownership transition, now may be an appropriate time to evaluate your business’s value. To see how we work with entrepreneurs planning for the future, explore our client stories. When you’re ready to discuss your situation, we’re here to help.