Which valuation method is most accurate?
None of them. Accuracy is the wrong frame — the useful method is the one your buyer will use, and for most SME transactions that is an earnings multiple.
None of them, and accuracy is the wrong frame. A valuation is an estimate of what someone else will pay, so the useful method is the one your buyer will use — and for most SME transactions that is an earnings multiple.
What each is actually good at
| Method | Good at | Weak at |
|---|---|---|
| Earnings multiple | Reflecting what the market pays | Explaining why |
| Discounted cash flow | Making assumptions explicit | Being right about the future |
| Asset-based | Establishing the floor | Valuing anything that earns well |
A multiple is a DCF with every assumption compressed into a single number that someone else already chose. That is its strength — the market did the work — and its weakness, because you cannot see inside it.
Why running all three is the answer
Not thoroughness for its own sake. The gaps between them are the information. If your DCF says €2.7M and your multiple says €2.2M, something in the forecast is more optimistic than the market. That gap is where the negotiation will happen, and knowing it beforehand is worth more than any single number.
The one test of a good valuation
Can you say which assumption your number is most sensitive to? If yes, you have a valuation. If no, you have a guess with decimals — regardless of which method produced it.
How to value a business runs the three side by side; DCF valuation explained covers the assumptions that matter most.