Definition (canonical)
Business valuation is the process of estimating what a company is worth — using market multiples, discounted future cash flows, or the value of its assets. No method outputs truth; each outputs a defensible range, and transactions settle where ranges and negotiating power meet.
The three families
| Method | Logic | Best for |
|---|---|---|
| Multiples | price = metric × market multiple (EV/EBITDA, EV/Sales, ARR×) | most SME deals; sanity-checking everything |
| DCF | value = discounted future free cash flows | stable, forecastable businesses |
| Asset-based | value = assets − liabilities (adjusted) | holdings, real-estate-heavy, liquidation floors |
Practice: multiples set the conversation ("companies like this trade at 5–7× EBITDA"), DCF justifies or challenges the range, asset value marks the floor. Recurring-revenue firms add ARR multiples driven by growth and retention quality (MRR/NRR).
What moves the multiple
Within one industry, multiples spread 2–3× — the spread is risk and quality pricing. Upward drivers: revenue predictability (recurring beats project), growth with retention, customer diversification, documented processes, a business independent of its owner, clean equity and financials. Downward: one dominant client, founder-centric operations, messy books, pending disputes, aging product. Sellers preparing 12–24 months ahead move the multiple more than any negotiation trick — because they change the risk, not the story about it.
Price vs value — the practical gap
Valuation says value; price adds deal structure: earn-outs shifting risk to the seller, escrows funding warranty claims, working-capital adjustments, competitive tension among buyers (an auction is worth more than any model). And strategic buyers pay for synergies financial models don't contain. Treat valuation as your negotiation floor and map — findings from due diligence then adjust the price inside the range.
FAQ
What is a small business worth as a rule of thumb? Micro-SMEs often trade around 2–4× normalized owner earnings (SDE); tech with quality ARR far higher. Rules start conversations, not close them.
Does valuation include debt? Multiples usually price enterprise value; equity value = EV − net debt. Confusing the two is the classic term-sheet accident.
Who should perform it? For transactions: an advisor with sector deal data; for courts and taxes: certified appraisers; for strategy: your own model, refreshed annually.
Do public-company multiples apply to my SME? Only after discounts for size, liquidity and key-person risk — applying listed multiples raw overstates SME value badly.
Related: EBITDA · Equity · Due Diligence · MRR & ARR Reviewed: 2026-07-15 · Sources: valuation practice