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Business Valuation Methods, Explained

There are three recognized approaches to valuing a business —income, market, and asset— and a handful of methods under each. A credible valuation applies more than one and explains why the chosen indications carry the weight they do.ExitSight includes the seven methods below plus the discounts, goodwill, and option models that accompany them. Each entry notes the worksheet name used inside the app, which is shorter than the formal name of the method.

ApproachPrincipleMethods in ExitSight
IncomeA business is worth the present value of the earnings it will produce for its owner.Multiple of discretionary earnings, capitalized earnings, discounted cash flow, excess earnings goodwill
MarketA business is worth what buyers have recently paid for similar businesses.Comparable sales, industry revenue and SDE multiples
AssetA business is worth no less than its assets less its liabilities, restated to market.Adjusted book value, orderly and forced liquidation

The methods, one by one

Multiple of Discretionary Earnings

Income approach

Recast earnings available to a single working owner, multiplied by a factor built from seven scored value drivers rather than picked out of the air.

Formula: Value = Discretionary earnings × Multiple (2–7, set by the value-driver score)

In the app: Earnings Multiple

Read the discretionary earnings guide ›

Capitalized Earnings Method

Income approach

One stabilized earnings figure divided by a capitalization rate. The cleanest method when next year genuinely looks like last year.

Formula: Value = Stabilized earnings ÷ Capitalization rate

In the app: Capitalized Earnings

Read the capitalized earnings guide ›

Discounted Cash Flow Method

Income approach

A five-year forecast of free cash flow plus a terminal value, each year discounted at a rate built up from observable components.

Formula: Value = Σ CFₜ ÷ (1 + r)ᵗ + Terminal value ÷ (1 + r)⁵

In the app: Discounted Cash Flow, Net Present Value, Adjusted Present Value

Read the discounted cash flow guide ›

Comparable Sales & Industry Multiples

Market approach

Price-to-revenue, price-to-SDE, and price-to-EBITDA multiples drawn from actual sales of similar companies, applied to your figures.

Formula: Value = Your metric × Median multiple from comparable sales

In the app: Market Comps

Read the market comparables guide ›

Adjusted Book Value & Liquidation

Asset approach

Restate every asset and liability from book to market value. Sets the floor beneath the income methods and the going-concern test.

Formula: Value = Assets at market − Liabilities at market

In the app: Business Goodwill worksheet (net tangible assets)

Read the adjusted book value guide ›

Excess Earnings & Business Goodwill

Income approach

Earnings above a fair return on tangible assets are capitalized separately as goodwill, then added to adjusted asset value.

Formula: Goodwill = (Earnings − Fair return on net tangible assets) ÷ Goodwill cap rate

In the app: Business Goodwill

Read the goodwill guide ›

Stock Option & Equity Grant Valuation

Specialized approach

Black–Scholes pricing for options, warrants, and equity grants, so contingent equity is not counted at face value.

Formula: Call = S·N(d₁) − K·e^(−rT)·N(d₂)

In the app: Stock Option Valuation

Read the option valuation guide ›

How the indications get reconciled

Seven methods produce seven numbers. ExitSight's All Valuation Methods worksheet lists them side by side with the weight you assign, computes the weighted conclusion, and charts the range so an outlier is obvious. The same table prints as Table 8 of the report, with your stated reason for each weight.

MethodApproachValueWt.Weighted
Multiple of discretionary earningsIncome$1,223,56035%$428,246
Discounted cash flowIncome$872,87125%$218,218
Capitalized earningsIncome$883,41515%$132,512
Excess earnings goodwillIncome$835,64310%$83,564
Market comparablesMarket$1,050,05510%$105,006
Adjusted present valueIncome$911,4065%$45,570
Concluded value100%$1,013,116

Figures from the Riverbend Machine Works sample engagement in thesample valuation report. Adjusted book value is computed as the floor beneath these indications and carries no weight here.