Business Valuation Methods — The Complete 2025 Guide

Short version: Choose the method that matches the business reality (owner‑run vs manager‑run, asset‑heavy vs cash‑flow, early‑stage vs mature). Normalise the numbers, price the risk correctly, and defend assumptions. Everything else is detail.

1) Overview & Method Selection

Every method is a lens on future benefits and risk. Pick based on operating reality:

2) Normalisation & Economic Adjustments

• Add‑backs: owner salary, excess comp, personal expenses, one‑offs → derive SDE.
• Working capital: normalise AR/AP/inventory to required level at close.
• Leases & IFRS/ASC: ensure comparability (IFRS 16/ASC 842).
• Seasonality & COVID‑era effects: show trailing twelve months (TTM) and run‑rate.

3) Income Approach

3.1 Capitalisation of Earnings

Use for stable cash flows. Value = Normalised Earnings ÷ Capitalisation Rate. Cap rate reflects required return minus long‑term growth. For SDE contexts, convert to EBITDA if comparing to market multiples.

3.2 Discounted Cash Flow (DCF)

• Project free cash flow (to firm or equity) 5–10 years.
• Discount at WACC (to firm) or cost of equity (to equity).
• Terminal value via Gordon Growth or Exit Multiple (sanity‑check with comps).
• Sensitivity: growth, margin, WACC, terminal assumptions.

3.3 Excess Earnings / MPEEM

Attribute earnings to contributory assets (working capital, fixed assets, workforce, brand, customer relationships). Residual earnings capitalised to value specific intangibles or overall enterprise, with contributory charges. Useful in PPA and IP‑heavy cases.

3.4 LBO Valuation

Financial‑sponsor view: maximum entry price given leverage, target IRR, and deleveraging profile. Key levers: debt capacity, cash conversion, multiple at exit.

4) Market Approach

4.1 Guideline Public Company (Trading Comps)

• Pick comparable listed peers; adjust for growth, margin, scale.
• Use EV/Revenue, EV/EBITDA, P/E as appropriate.
• Private company discount if needed.

4.2 Guideline Transactions (Precedents)

• Use actual deal multiples from similar size/niche/geo.
• Beware cycle timing and synergies embedded in prices.

4.3 Industry Rules of Thumb

Heuristics (e.g., % of revenue + inventory for some retail/service). Use only as a cross‑check, not a primary method.

5) Asset Approach

5.1 Adjusted Net Asset Value (ANAV)

• Mark assets and liabilities to fair value, include off‑balance sheet items.
• Often a floor value; dominant for holding, capital‑intensive, or distressed cases.

5.2 Replacement/Reproduction Cost

Value equals cost to reproduce or replace the asset base to same utility, adjusted for obsolescence (physical, functional, economic).

5.3 Asset Accumulation / Sum‑of‑the‑Parts

Value each unit or asset category separately, sum for enterprise; useful for conglomerates or break‑up analyses.

6) Intangible Asset Valuation

6.1 Relief‑from‑Royalty

For brands, software, patents: estimate a market‑based royalty rate, apply to forecast revenue, tax‑effect and discount to PV.

6.2 MPEEM (Multi‑Period Excess Earnings)

Isolate cash flows attributable to a specific intangible (e.g., customer relationships) after contributory asset charges; discount at an asset‑specific rate.

6.3 With‑and‑Without

Model business cash flows with and without the subject asset; the difference is the asset’s value.

6.4 WARA Cross‑Check

Ensure the weighted return on individual assets approximates WACC to confirm consistency.

7) Early‑Stage & Venture Methods

7.1 VC Method

Start with exit value (sector exit multiple × future revenue/EBITDA), discount at target IRR, divide by ownership to infer pre‑money.

7.2 Berkus Method

Score five risk areas (idea, prototype, team, strategic relationships, sales); assign capped $ amounts; sanity‑check vs traction.

7.3 Scorecard / Risk Factor Summation

Weight key factors (team, market, product, competition, need for more capital) against regional comparables to adjust median pre‑money.

7.4 First Chicago

Scenario analysis (bear/base/bull) with probabilities; value is probability‑weighted PV of outcomes.

8) Sector Lenses (SaaS, Marketplace, E‑commerce)

• SaaS: ARR, NRR/GRR, Rule of 40, CAC payback, gross margin, cohort decay; value tends to scale with durable NRR and capital efficiency.
• Marketplace: GMV, take rate, liquidity, buyer/seller concentration, escrow/dispute rates.
• E‑commerce: contribution margin after ads/fulfilment, inventory turns, return rates, cash conversion cycle.

9) Control, Marketability & Other Adjustments

• Control premium / DLOC: adjust when moving between minority ↔ control levels of value.
• DLOM: discount for lack of marketability (private shares vs public).
• Synergies: strategic buyer may pay above standalone value—document sources (cost outs, cross‑sell, footprint).
• Working capital peg: define early to avoid price chips at close.
• Country/size premia: add to cost of equity where applicable.

10) Cost of Capital (WACC, CAPM, Beta)

• Cost of equity: r_f + β×(E[R_m]−r_f) + size + country + specific risk.
• Beta: choose peer beta; unlever → relever via Hamada with target D/E.
• Cost of debt: credit spread + r_f, tax‑effected.
• WACC: (E/V)×r_e + (D/V)×r_d×(1−T).

11) Terminal Value (GG vs Exit Multiple)

• Gordon Growth: TV = FCF_t+1 ÷ (WACC − g). Keep g conservative and below long‑run GDP.
• Exit Multiple: apply peer EV/EBITDA to terminal year; sanity‑check with growth/margin vs peers.

12) Taxes, Structure & Accounting Considerations

• Asset vs share sale tax impact; step‑ups and goodwill amortisation depend on jurisdiction.
• Purchase Price Allocation (PPA) aligns with valuation of acquired assets and goodwill; subsequent impairment tests rely on supportable assumptions.
• Deferred revenue and sales tax/VAT exposures can be price chips if ignored.

13) Common Pitfalls & Red Flags

• Mixing levels of value (minority vs control) and methods without reconciling.
• Using public multiples on SDE without converting to EBITDA.
• Terminal values doing all the work; no sensitivity shown.
• Ignoring working capital needs and capex—DCF turns into wishful thinking.
• Customer concentration, unrecorded liabilities, off‑book staff—buyers will haircut.

14) Method Selection Decision Tree

• Stable owner‑run? Cap of earnings / SDE multiple → cross‑check with transactions.
• Manager‑run growth? DCF + EBITDA comps → triangulate.
• Asset‑heavy/distressed? Adjusted NAV → overlay liquidation if needed.
• IP‑driven? Relief‑from‑royalty or MPEEM → WARA check.
• Early‑stage? VC/First Chicago → triangulate with scorecard.

15) Mini‑Case Example (Abbreviated)

Service firm at $2.4m revenue, $420k SDE; after normalisation SDE = $480k. Cap rate 25% (implied multiple 4.0×) → $1.92m. EBITDA after market manager comp = $300k; EV/EBITDA 6.0× from private comps → $1.8m. DCF (FCFF base $320k, WACC 15%, g=3%) → $1.85m. Triangulated value range: $1.8m–$1.95m before working capital peg and deal structure.

16) Data Required — Valuation Checklist

• 3 years financials + TTM; bank statements; tax returns
• AR/AP ageing; inventory; fixed assets; debt schedule
• Customer cohort stats; churn/retention; pricing; contracts
• Org chart; payroll; contractor agreements; key person risks
• Legal: licences, leases, litigation, IP
• KPIs by sector (SaaS, marketplace, e‑com)

17) Broker vs DIY Valuation

• DIY works when books are pristine and a clear buyer exists.
• Broker adds market comps access, realistic pricing discipline, confidentiality, and negotiation to hold value through diligence. See what brokers actually do and how fees work.