Business Valuation Methods and Multiples: How Buyers Determine Your Company’s Worth

When it’s time to sell your business, one of the first questions you’ll face is: What’s it worth? 

Valuation isn’t just about crunching numbers — it’s about understanding how buyers think, what drives perceived value, and which factors you can influence before going to market.  Remember, no matter what you believe, your company is only as valuable as someone is willing to pay. 

By knowing the common valuation methods and the elements that impact multiples, you can set realistic expectations, negotiate more effectively, and take steps to boost your company’s worth. 

Common Business Valuation Methods 

1. Asset-Based Valuation

This method totals up the value of your company’s assets — like equipment, property, and inventory — and subtracts liabilities. 

• Best for: Asset-heavy businesses or companies being liquidated. 
• Limitations: Often undervalues businesses with strong earnings potential or significant intangible assets like brand reputation or proprietary processes. 
• Rarely used for an ongoing business. 

2. Market-Based Valuation

Also called the “comparables” approach, this method looks at what similar companies have sold for or are currently valued at. 

• Best for: Industries with active buying/selling activity and accessible market data. 
• Limitations: It can be hard to find truly comparable businesses, especially if yours is in a niche market.  May have to compare to related businesses and understand differences. 
• Commonly used as one data point. 

3. Income-Based Valuation (Discounted Cash Flow – DCF)

Projects future cash flows and discounts them to present value using a rate that reflects risk. 

• Best for: Stable businesses with predictable revenue streams. 
• Limitations: Requires solid forecasting and can be sensitive to small changes in assumptions. 
• Probably the most commonly used main valuation method. 

Understanding Valuation Multiples 

Revenue Multiples (EV/Revenue) 

Compares enterprise value (EV) to annual revenue. Often used for high-growth or subscription-based companies where profitability is still developing. 

EBITDA Multiples (EV/EBITDA) 

Compares EV to earnings before interest, taxes, depreciation, and amortization. Commonly used for established, profitable businesses because it gives a clear view of operating performance.   

Very common metric for valuing a going business as it anticipates paying for the future value as well. 

SDE Multiples (Seller’s Discretionary Earnings) 

Adds the owner’s salary, perks, and certain non-recurring expenses back to net income to show total financial benefit to a single owner-operator. Often used for small, owner-managed businesses.   

Important for a seller to adjust for these BEFORE sending financials to potential buyers as buyers often refuse or are reluctant to allow add backs. 

Factors That Influence Multiples 

Internal Factors 

• Recurring revenue streams. 
• Consistent growth in sales and profits. 
• Strong margins compared to industry benchmarks. 
• Low customer concentration (no single client making up too much revenue). 
• Depth of management team and operational efficiency. 
• Differentiators like unique products, patents, or market position. 

External Factors 

• Overall industry health and growth trends. 
• Market demand for businesses like yours. 
• Competitive landscape and barriers to entry. 
• Broader economic conditions and capital availability. 

Choosing the Right Valuation Approach 

The best method depends on your business’s size, industry, and stage of development: 

• High-growth startup: Revenue multiple may be most relevant. 
• Mature, profitable company: EBITDA multiple is likely more accurate. 
• Owner-operated small business: SDE multiple often works best. 

An experienced M&A advisor can help select the approach that puts your business in the most favorable light for potential buyers. 

Why Valuation Knowledge Matters 

Understanding how valuation works lets you: 

• Set realistic asking prices. 
• Justify your number to buyers. 
• Identify areas to improve before going to market. 

Remember: Valuation is a snapshot in time. Market conditions change — which means the right preparation at the right time can make a big difference in your final sale price. 

FAQs 

Q: How do I know what multiple applies to my business?
A: Multiples vary by industry, market conditions, and the specifics of your company. An M&A advisor can provide benchmarks based on comparable sales. 

Q: Can I increase my multiple before selling?
A: Yes — by improving recurring revenue, strengthening your competitive advantages, and boosting profitability. 

Q: Which method do buyers trust most?
A: Many buyers focus on EBITDA multiples because they reflect operational performance and cash flow potential.