How Is a Business Valued?

Three primary approaches: the income approach (capitalizing earnings or discounting cash flows), the market approach (using comparable transaction multiples), and the asset approach (summing the fair market value of individual assets). Each produces different results depending on the business.

Earnings Before Interest, Taxes, Depreciation, and Amortization is the most common metric for mid-market business valuation. Buyers typically apply a multiple to normalized EBITDA to determine enterprise value.

EBITDA multiples for businesses generating $1M to $50M in revenue typically range from 3x to 7x depending on industry, growth rate, customer concentration, and market conditions. Construction and professional services tend toward the lower end; technology toward the higher.

Normalization adjusts financial statements to reflect the true economic earnings of the business by removing one-time expenses, owner compensation above market rate, personal expenses run through the business, and other non-recurring items.

Minority interest discounts reduce value for ownership stakes below 50% that lack control. Marketability discounts reduce value for interests that cannot be easily sold on a public market. Both are relevant for LLC buyout provisions and succession planning.

Formal valuations are required for buy-sell agreements, estate and gift tax planning, partner disputes, divorce proceedings, and certain regulatory filings. The IRS requires defensible valuations for tax-related transfers.

When buyer and seller disagree on value, earnout provisions, seller financing, escrow holdbacks, and contingent consideration can bridge the gap. Clark Meyers PC structures these mechanisms to protect buyers while making deals feasible.

Always conduct your own independent analysis. Seller-provided valuations reflect their optimistic assumptions. Your due diligence should validate financial representations and test valuation assumptions.