Market Approaches and Market Methods for Business Valuation

Market Approaches and Market Methods for Business Valuation

Market Approaches in business valuation compare market sales to the company being valued.  This is done by estimating a ratio of sales price to cash flow  called a multiple or multiplier (i.e. $300 sales price / $100 of cash flow = a multiplier of 3.)  Then the selected multiple is applied to the same estimated cash flow of the subject company to determine a value.

Thereafter the multiplier is multiplied against the subject company cash flow to obtain an estimate of value.

Business brokers often have “rules of thumb” that use the market method formula.  For instance deli’s sell for 35% of revenues.  This is not based on research and detailed thought, just a form of common knowledge.  Technically, that does not reach the level of a valuation as it is unlikely to be supportable.

Two primary Market Methods are most frequently used by valuators are:

The Public Company Guideline Comparable Method which uses stock prices from similar public companies.  This methodology is really not suitable for most small and very small business valuations as large companies tend to be quite different from small ones.  Namely, is Home Depot like your corner hardware store?

The second method is the Private Company Guideline Comparable Method.

The Private Company Guideline Comparable Method uses transaction data from private company sale databases.  DealStats, Bizcomps, and Valusource Market Comps are all good sources for small and very small business comparables.

Typically, the valuator will start the process to find comparables by searching for the industry by NAICS (North American Industry Classification System) or SIC (Standard Industrial Classification) system codes.  Depending on the number of results (at least 8-10), the valuator may add related codes or narrow the search by company size based on revenues and perhaps profitability based on profits or a defined cash flow.  Comparable data is then reviewed using key word sorts, detailed data, charting and graphing results based on cash flow profitability and other indicators to see how similar it is to the subject company. These reviews are very detailed and complex.

Finally, a multiplier is selected by reviewing the comparable data and the subject company for both financial information and soft data. (These resources can include both internal such as concentrations, management strength, systems, etc. and external such as the economy and industry).

This process requires both skill at analyzing the data and professional judgment.  But, for small and very small businesses (also known as micro-businesses), the market method is the only method of business valuation that can really be tied into market data.

Typical cash flows used for valuation may include:

  • revenues
  • gross profit
  • EBITDA (earnings before interest, taxes, depreciation, and amortization)
  • SDE (seller’s discretionary earnings which is EBITDA plus all the ways one owner makes money from the business)

Each has advantages and disadvantages. The choice should be based on the fact pattern of the business and, of course, the available, selected comparable data.  In general, in less experienced valuators hands, EBITDA or SDE tend to result in more useful values than the other possible cash flow choices.  This is because people buy businesses based on the amount of money they think they will make in the future owning the business.

In many cases, a final adjustment needs to be made for assets or liabilities on the balance sheet beyond those typically conveyed for the price specified in the market data database.

An example of this is that in many retail businesses inventory purchased by the buyer is added to the value found based on cash flow.

The Market Method for providing an opinion of value of a business is often complex and relies heavily on experienced professional judgment.  With a skilled valuator, the Market Method is the best method for valuing most small businesses with revenues below $5,000,000 and should be reviewed carefully for valuing companies with revenues up to $10,000,000 or more.


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Download the e-book “7 Things to Know About Business Valuation“  – and then connect with Greg if you have any questions about a business valuation for you or your clients

Greg is a Partner at Harvest Business Advisors where he has valued and brokered hundreds of small and mid-sized businesses.   As Editor-In-Chief of “Around the Valuation World,” a monthly webinar for the National Association of Certified Valuators and Analysts (NACVA), he is in the forefront of current business valuation practices.

Asset Approaches and Asset Methods of Business Valuation

Asset Approaches and Asset Methods of Business Valuation

Asset Approaches in business valuation compares the value of the assets less the value of the liabilities (debts) of the company and the difference is the company value.  The formula is Assets – Liabilities = Value.

For small businesses this tends to be limited to the physical tangible assets.  Intangible assets such as the value of the customer list, value of systems and processes, etc. tend to be lumped into goodwill and are not independently valued under the asset approach.

The assets and liabilities are often valued to different standards of value.  An easy way to think of standard of value is it answers “who is establishing this value”.  Another way to look at it is “who is the buyer and who is the seller.”   Also, in the case of asset methods, standard of value may include time available to sell on the market.

              Book Value is the value the asset are carried in the accounting records.  This is the purchase price less depreciation.  This may or may not reflect a market value.  This is a value to the seller for accounting and/or tax purposes.

              Market Value tends to value assets at the current value, near what might be considered dealer or distributor prices.  Namely what the company would have to spend to acquire assets in similar condition or what they might sell a few assets for under normal operations.

               Liquidation Value is the sale price for the assets under assumptions about the timing of the sale.  Orderly liquidation means perhaps 90 days to sell (a bad situation but not dire).  Forced liquidation means auction value.

Clearly each of these assumptions will change the value found dramatically.

Below is a simple example without estimating a value for intangible assets or goodwill:

Small Business Valuation -Asset Approach - Example

Note the range of values found under the asset method depending on the standard of value applied.  Choosing which value is most appropriate will depend on the underlying fact pattern of the subject company.


If you own a business, or prepare business valuations, or advise business owners based on business valuations (i.e. attorneys, CPA’s, financial planners, lenders, business brokers, etc.) you owe yourself and your clients the peace of mind of really understanding small business valuation.

“The Art of Business Valuation, Accurately Valuing a Small Business”, written by Greg Caruso will be published by Wiley in Fall 2020. The book is geared for valuating businesses with revenues under $10 million. This resource is easy to understand yet addresses the technical side of valuing small and very small businesses.  In addition, the related website has sample reports, checklists and working Excel files of many calculations.

Click here to know when the book is available for purchase  – and when any bonuses  are available!