What Is Business Valuation?

Business valuation uses three primary approaches: (1) Income approach — values the business based on expected future cash flows, discounted to present value (DCF analysis) or capitalized at a rate reflecting risk; (2) Market approach — compares the business to similar companies that have been sold, using multiples like EV/EBITDA, EV/Revenue, or price/earnings; and (3) Asset approach — values the business based on its net assets (total assets minus total liabilities), typically used for asset-heavy or holding companies. Most valuations use a combination. The appropriate method depends on the purpose: the IRS requires specific approaches for estate and gift tax valuations under Revenue Ruling 59-60, while M&A transactions rely more on market comparables and DCF. Key factors affecting valuation include revenue size and growth rate, profit margins, customer concentration, management dependency, industry multiples, competitive position, and intellectual property. Private companies typically trade at a discount to public comparables due to lack of liquidity and marketability — these discounts (DLOM, DLOC) can reduce fair market value by 15–35%. Valuation is both art and science — reasonable professionals can arrive at meaningfully different conclusions using the same data, which is why qualified, credentialed valuators (ASA, ABV, CVA) are important.