Valuing a small business: three approaches and when each applies

There is no single correct value for a private business, only a value appropriate to a purpose. The method that supports a negotiated sale is rarely the one that satisfies a statutory requirement, and using the wrong one invites challenge.

Asset-based

Values the business as the sum of its net assets. It suits asset-heavy operations, holding companies and situations where the business would realistically be wound up rather than continued. It tends to understate a profitable trading business, because it captures nothing of the goodwill or customer relationships.

Earnings-based

Applies a multiple to maintainable earnings, or discounts projected cash flows. This is the usual approach for a going concern. The difficulty lies in establishing what earnings are genuinely maintainable once owner remuneration, one-off items and related party transactions have been normalised.

Market comparison

Looks to prices achieved for comparable businesses. It is intuitive and easily explained, but genuinely comparable transactions are scarce in smaller markets, and the adjustments needed to bridge the differences often outweigh the comfort the comparison provides.