What is a business valuation?
An estimate of what a business would change hands for between a willing buyer and seller — expressed as a range with its assumptions attached, not as a single figure.
A business valuation is an estimate of what a company would change hands for between a willing buyer and a willing seller, neither under pressure. Done properly it produces a range with its assumptions written down — not a single number, because a single number hides the disagreement that will decide the price.
What it is not
It is not the sum of your assets, not what you have invested, and not what the business is worth to you. All three are common starting points and none of them are what a buyer pays for. A buyer pays for future earnings, discounted for the risk that those earnings do not appear.
The three standard approaches
| Approach | Basis | Used when |
|---|---|---|
| Income | Normalised earnings × a multiple | Most SME transactions |
| Discounted cash flow | Future cash, discounted for risk | Predictable cash flows |
| Asset-based | Net assets at realistic values | The floor, and asset-heavy businesses |
Running more than one is not thoroughness for its own sake. Where they disagree tells you which assumption the negotiation will be about — see DCF valuation explained for how sensitive that can be.
Indicative versus formal
An indicative valuation tells you the range and what drives it. A formal valuation is a signed document with professional liability behind it, required where a tax authority, a court or a lender demands one. They cost differently by two orders of magnitude, and most owners only ever need the first.
How to value a business covers the process end to end.