Business Valuation Methods: 6 Key Approaches Explained

By Joey N. Friedman, CPA, ABV, MAcc, MIB — President, Joey Friedman CPA PA. This article is published by Joey Friedman CPA PA, a Florida professional association. All forensic accounting, business valuation, expert witness, and litigation support services described herein are provided by Joey Friedman CPA PA. Mr. Friedman’s professional credentials and experience are exercised in his capacity as an officer, agent, and licensed CPA practicing under and on behalf of Joey Friedman CPA PA.

Quick Answer

6 business valuation methods grouped by income market and asset approach
Business Valuation Methods: 6 Key Approaches Explained 1

Business valuation methods group into three approaches: income, market, and asset. Within those approaches, six core methods cover virtually every closely-held business valuation: (1) discounted cash flow, (2) capitalization of earnings, (3) guideline public company method, (4) guideline transaction method, (5) net asset value, and (6) liquidation value. AICPA Statement on Standards for Valuation Services (SSVS) No. 1 requires the analyst to consider all three approaches for any formal valuation engagement and to document the methods applied, the methods considered and rejected, and the reconciliation of results across methods. Most defensible valuations apply at least two methods from two different approaches and reconcile the conclusions.

The six methods aren’t interchangeable — each fits different facts. A profitable operating business is typically valued by income and market approaches; an asset-heavy holding company by net asset value; a failing business by liquidation value. This article explains each method, when it applies, what data it requires, and how the forensic CPA reconciles across methods to produce a defensible value conclusion.

The Three Approaches (Framework)

Before the six methods, the three approaches frame the analysis:

Income approach. Values the business based on its future earnings or cash flows discounted back to present value. The economic premise: a business is worth the present value of the income it will generate.

Market approach. Values the business based on comparable companies that have been valued in the public market or in actual transactions. The economic premise: a business is worth what similar businesses have sold for or trade for.

Asset approach. Values the business based on the fair market value of its underlying assets net of liabilities. The economic premise: a business is worth at least the value of what it owns minus what it owes.

For any closely-held business valuation, AICPA SSVS No. 1 — the AICPA Statement on Standards for Valuation Services — requires the analyst to consider all three approaches. The analyst may apply one, two, or all three methods within the approaches, and must reconcile any divergent results in the final value conclusion.

Method 1: Discounted Cash Flow (Income Approach)

The discounted cash flow (DCF) method projects the business’s future cash flows for a defined period (typically 5–10 years), adds a terminal value at the end of that period, and discounts all those cash flows back to present value using a risk-adjusted discount rate.

Steps

  1. Project future revenue (year-by-year)
  2. Project operating expenses and EBITDA
  3. Adjust for capital expenditures, working capital changes, and taxes to derive free cash flow to the firm (FCFF)
  4. Project a terminal value at the end of the explicit period (Gordon growth model or exit multiple)
  5. Calculate the discount rate (typically a weighted average cost of capital — WACC — for the firm)
  6. Discount each year’s cash flow + terminal value back to present value
  7. Sum the present values to reach enterprise value

When DCF applies

DCF is the conceptually purest valuation method. It applies when:

  • The business has predictable, projectable cash flows
  • The growth trajectory is reasonably forecastable
  • Management projections are available and defensible
  • The matter requires a thorough income-approach analysis

Limitations

DCF is highly sensitive to inputs. Small changes in discount rate, growth rate, or projected cash flows produce large changes in value. The analyst must defend every input. In litigation, opposing counsel will probe each assumption. Projection-driven valuations are vulnerable when management’s projections diverge from historical performance.

Method 2: Capitalization of Earnings (Income Approach)

The capitalization of earnings method takes a single normalized earnings figure and divides by a capitalization rate. The result is value.

Value = Normalized earnings ÷ Capitalization rate

The capitalization rate is the discount rate minus the long-term growth rate. So a discount rate of 15% combined with a 3% long-term growth rate produces a 12% capitalization rate. Normalized earnings divided by 0.12 = value.

When capitalization applies

Capitalization works well when:

  • The business has stable, recurring earnings
  • Growth is moderate and stable (not multi-stage)
  • The business is mature and not undergoing rapid change
  • The analyst wants a simpler alternative to DCF for a stable cash flow profile

Limitations

Capitalization assumes constant growth — which doesn’t fit growth-phase or declining businesses well. For those, DCF’s explicit-year projection is more appropriate.

Capitalization vs. DCF

For closely-held business valuations, capitalization of normalized earnings is often the workhorse income-approach method because management projections are frequently unreliable for closely-held businesses (they’re prepared for owner purposes, not arm’s-length valuation). DCF is reserved for situations with strong projection support — typically larger businesses or growth-phase companies.

Method 3: Guideline Public Company Method (Market Approach)

The guideline public company method identifies publicly-traded companies in the same industry as the subject and uses their multiples (most commonly EV/EBITDA) to value the subject.

Steps

  1. Identify guideline public companies — same industry, similar size, similar growth/risk profile
  2. Calculate each guideline’s EV/EBITDA, EV/Revenue, P/E (and other relevant multiples)
  3. Apply adjustments for size, growth, profitability, and risk differences between the public companies and the subject
  4. Apply the resulting multiple to the subject’s normalized financial metric
  5. The result is an indication of value

When the method applies

  • The subject industry has enough publicly-traded comparables
  • The subject is mature enough to compare meaningfully to public companies
  • The matter requires market-approach evidence in the report

Limitations

Public companies trade at a premium for liquidity and disclosure transparency. Private-company comparables don’t get this premium. The analyst typically applies a discount (the marketability discount) to bridge the gap. The selection of guideline companies is also often the focus of cross-examination.

Method 4: Guideline Transaction Method (Market Approach)

The guideline transaction method identifies actual sales of similar closely-held businesses and uses the transaction prices to derive multiples for the subject.

Steps

  1. Search transaction databases (DealStats, BIZCOMPS, Bloomberg M&A, etc.) for comparable transactions
  2. Filter by industry, size, geography, and recency
  3. Calculate each transaction’s EV/EBITDA, EV/SDE, EV/Revenue
  4. Apply the resulting multiple to the subject’s normalized financial metric
  5. The result is an indication of value

When the method applies

  • The subject industry has enough recent comparable transactions documented in available databases
  • The transaction prices are documented (private transactions often aren’t)
  • The matter requires market-approach evidence — particularly for litigation where the analyst wants observed-price evidence

Limitations

Transaction data tends to be older than public-market data. Transactions vary in deal-specific terms (earnouts, contingent consideration, strategic premiums) that affect comparability. Smaller closely-held transactions are particularly hard to find data on. The analyst’s selection of comparable transactions is often challenged.

Combining Methods 3 and 4

Most thorough market-approach analyses use BOTH the guideline public company and guideline transaction methods. The analyst weighs the two based on data availability and comparable quality.

Method 5: Net Asset Value (Asset Approach)

The net asset value method (sometimes called “adjusted book value”) restates the company’s balance sheet to fair market value, then calculates equity value as fair market value of assets minus fair market value of liabilities.

Steps

  1. Take the company’s balance sheet at the valuation date
  2. Restate each asset to fair market value (real estate appraised, equipment appraised, inventory marked to net realizable value, receivables marked to net collectible value, etc.)
  3. Restate each liability to fair market value (typically face value unless distressed)
  4. Subtract liabilities from assets to derive net asset value (equity)

When NAV applies

  • Asset-heavy businesses where the operations don’t add much above asset value (e.g., real estate holding companies, investment companies, asset-light businesses)
  • Going-concern businesses where operations contribute little above net assets
  • As a “floor” check on income/market approach conclusions — the equity value shouldn’t fall below the net asset value (otherwise the owner would liquidate)
  • Holding companies whose primary business is owning other entities

Limitations

NAV doesn’t capture going-concern value — the value the operating business creates above its asset base. For a profitable operating business, NAV will understate value because it ignores enterprise goodwill, customer relationships, brand, and operational know-how. For these businesses, income and market approaches produce higher (and more accurate) conclusions.

Method 6: Liquidation Value (Asset Approach)

The liquidation value method assumes the business stops operating and the assets are sold off, often under time pressure. The analyst calculates the proceeds the owners would realize from a forced or orderly liquidation.

Steps

  1. Take each asset and estimate its liquidation value (typically below fair market value for orderly liquidation; further below for forced)
  2. Subtract liquidation costs (legal, accounting, broker fees, severance, etc.)
  3. Subtract all liabilities
  4. The result is the net proceeds the owners would receive

When liquidation value applies

  • The business is failing and likely to be liquidated
  • The matter involves the bankruptcy or wind-down of a business
  • The standard of value requires liquidation (rare — usually a fact-specific question)
  • As a floor check that establishes the minimum value

Limitations

Liquidation value typically represents the lowest defensible value of the business — because no buyer would pay less than what the assets are worth in liquidation (knowing they could buy and liquidate). It usually doesn’t represent the “correct” value of an operating business unless liquidation is genuinely contemplated.

How the Methods Get Reconciled

For most operating closely-held businesses, the analyst applies methods from at least two approaches — typically income (capitalization or DCF) and market (guideline public company and/or guideline transaction). The analyst then reconciles the indicated values to reach a final conclusion.

Reconciliation considers:

Which methods produced the most reliable evidence? Sometimes guideline transaction data is rich and recent; sometimes income-approach projections are weak. The reconciliation gives more weight to the better-supported method.

What’s the spread across methods? If methods produce wildly different values (e.g., $1M vs. $3M), the analyst investigates the divergence. Material divergence requires explanation.

What’s the matter context? A divorce valuation in Florida uses fair market value; a shareholder oppression valuation uses fair value; a transaction valuation may use investment value. The reconciliation has to align with the standard of value.

What’s the asset floor? If income/market approaches produce a value below net asset value, the analyst explains why (operating losses, lack of growth, distressed conditions) or revises the conclusion.

The final value conclusion is typically a single number (or a tight range) that reflects the analyst’s professional judgment about how to weight the methods.

Premise of Value: Going Concern vs. Liquidation

Underlying every method is the premise of value:

Going concern assumes the business continues operating. Methods 1–5 typically assume going concern.

Liquidation assumes the business stops operating and assets are sold. Method 6 is the explicit liquidation method.

The premise applied is itself a judgment. A business with operating losses might be valued as a going concern if there’s reasonable expectation of recovery; otherwise it might be valued at liquidation. The analyst documents the premise selected and the basis for that selection.

Standard of Value: Why It Matters for Method Selection

The standard of value (fair market value, fair value, investment value, intrinsic value) shapes which methods apply and how the results get adjusted:

Fair market value (FMV) — the price between a willing buyer and willing seller, neither under compulsion. Standard for divorce in Florida, estate and gift tax, transactional buyouts. Typically applies marketability discounts and (where appropriate) lack-of-control discounts.

Fair value — typically the proportional share of total enterprise value, with no marketability or minority discounts. Standard for Florida shareholder oppression (statutory). Different statutory definitions in other states.

Investment value — the value to a specific buyer with specific synergies. Standard for some transactional matters where strategic value matters.

Intrinsic value — the analyst’s view of “true” value, independent of market signals. Less common in practical valuation.

The standard of value affects which discounts apply, which methods get the most weight, and how the final conclusion gets reconciled. The valuation report must state the standard of value clearly and apply it consistently. See fair market value vs. fair value for a deeper comparison.

What a Defensible Method Selection Looks Like

For litigation valuation work, the analyst’s method selection has to survive cross-examination. Defensible documentation includes:

  • The methods applied, with reasoning for each
  • The methods considered and rejected, with reasoning
  • The inputs to each method, sourced from primary records
  • The output of each method, with sensitivity to key inputs
  • The reconciliation across methods with explicit weight given to each
  • The premise of value and the basis for that premise
  • The standard of value and the basis for that standard
  • The discounts applied (DLOM, DLOC, etc.) with empirical support

This is the documentation discipline that lets the opinion withstand Daubert challenges. See Daubert-ready CPA expert witness checklist for the broader framework.

When You Need a Professional

For internal-management or rough-planning purposes, an owner or accountant can produce a rough estimate of value using one of the six methods. For any formal purpose — litigation, tax filing, transaction, financing, partnership buyout — the valuation should be performed by a credentialed business valuation professional. Credentials to look for: ABV (AICPA), CVA (NACVA), ASA (American Society of Appraisers). See business valuation accountants for guidance on selecting a qualified specialist.

Frequently Asked Questions

What are the 3 main approaches to business valuation?

The three main approaches are: income (values based on future earnings), market (values based on comparable transactions or public companies), and asset (values based on fair market value of underlying assets minus liabilities). AICPA SSVS No. 1 requires consideration of all three approaches for any formal valuation engagement.

How many methods of business valuation are there?

The 6 core methods are: discounted cash flow, capitalization of earnings, guideline public company, guideline transaction, net asset value, and liquidation value. These six cover virtually every closely-held business valuation. Within each method, the analyst makes choices (which comparables, which discount rate, which discount percentages) that shape the result.

Which business valuation method is most accurate?

No single method is most accurate in all cases. The best valuations apply multiple methods and reconcile across them. For profitable operating businesses, income and market approaches typically produce the most defensible conclusions. For asset-heavy businesses, the asset approach is most appropriate. The analyst’s job is to select methods that fit the facts and produce a defensible reconciliation.

What’s the difference between DCF and capitalization of earnings?

DCF projects cash flows year-by-year for an explicit period (typically 5-10 years) plus a terminal value, then discounts each back to present. Capitalization assumes constant growth and divides a single normalized earnings figure by a capitalization rate to derive value in one step. DCF fits multi-stage growth profiles; capitalization fits stable, mature businesses with predictable growth.

Why use guideline public company method if private companies are different?

Public companies provide the most observable, current, market-derived multiples. Private-company valuations adjust for the differences (size discount, marketability discount, control adjustments). The method is rigorous when the adjustments are well-supported empirically. Even imperfect public-company comparables provide market discipline that pure income-approach methods lack.

When does net asset value apply over income or market methods?

Net asset value applies when (a) the business is asset-heavy (real estate, investment holding companies), (b) operating income is minimal or negative, (c) the business is being valued as a wind-down candidate, or (d) the income/market approach conclusions need a floor check. For profitable operating businesses, NAV typically understates value and isn’t the primary method.

Is the asset approach the same as book value?

No. The asset approach uses fair market value of assets minus fair market value of liabilities. Book value uses historical-cost accounting figures, which often differ materially from fair market value (especially for real estate, equipment with appreciation/depreciation differences, and goodwill, which book value usually excludes). Asset approach restates the balance sheet to fair market value; book value does not.

How long does a 6-method business valuation take?

A thorough valuation applying multiple methods typically runs 4-8 weeks for a moderately complex closely-held business. Tax-driven valuations on tight deadlines can compress to 3-4 weeks with appropriate scope. Complex litigation valuations (multiple businesses, normalizations, international elements) can run 12-20 weeks. Engagement cost varies by complexity, the number of methods required, and the deliverable depth — defensible litigation reports require more time than simpler internal-management estimates.

Working with a Business Valuation Professional

If you need a business valuation for a Florida divorce, shareholder oppression case, partnership dissolution, estate or gift tax matter, transactional buyout, or commercial litigation, engaging a credentialed business valuation professional early in the matter is essential. The methods selected, the data collected, and the analytical depth all benefit from being planned at the start.

Joey Friedman CPA PA, through its President Joey N. Friedman, CPA, ABV, MAcc, MIB, provides ABV-credentialed business valuation services throughout Florida. The firm’s valuation practice applies all six methods discussed in this article — in combination as the facts require — across divorce, shareholder oppression, partnership dissolution, estate and gift tax, and commercial litigation matters. Contact the firm to discuss your specific situation.

About Joey Friedman CPA PA

Joey Friedman CPA PA is a Florida professional association providing forensic accounting, business valuation, expert witness, and litigation support services. The firm is led by Joey N. Friedman, CPA, ABV, MAcc, MIB, who serves as the firm’s President.

All services described in this article are provided by Joey Friedman CPA PA. Engagement letters and professional services are issued by the firm. Joey N. Friedman signs in his capacity as the firm’s President — as an officer and agent acting on behalf of Joey Friedman CPA PA, not in any personal or individual capacity. Mr. Friedman’s professional credentials — including CPA license, ABV (Accredited in Business Valuation, AICPA), and ACFE membership — are exercised under the firm.

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