The Business Valuation Process Explained: What Every Owner Should Know
Before listing your company, understanding what it’s actually worth is essential. A business valuation isn’t just a number, it’s a strategic tool that helps you plan, negotiate, and maximize your exit.
Here’s exactly how the valuation process works and what determines your company’s market value.
Step 1 — Understanding Why You Need a Valuation
Business owners seek valuations for:
Selling a business
Partnership buyouts or disputes
Estate or tax planning
Mergers and acquisitions
SBA or bank financing
Knowing your goal helps the broker choose the right valuation method.
Step 2 — Normalizing Your Financials
Valuators start by adjusting financial statements to reflect true earnings. This includes:
Adding back owner’s compensation above market rate
Removing personal expenses
Adjusting for one-time costs or revenues
This “normalized” EBITDA gives a clearer picture of operational profitability.
Step 3 — Applying Valuation Methods
There are three primary approaches used in business sales:
1. Market Approach
Compares your business to similar companies that recently sold (“comps”).
2. Income Approach
Projects future earnings and discounts them to present value. Ideal for stable, profitable companies.
3. Asset Approach
Values the company based on tangible and intangible assets minus liabilities. Typically used for asset-heavy or unprofitable businesses.
Step 4 — Assessing Key Value Drivers
Buyers pay for past performance, not future potential. Valuators analyze:
Customer concentration
Management depth
Growth trends
Recurring revenue
Industry outlook
Strong fundamentals here increase your multiple.
Step 5 — Calculating the Valuation Range
The result is typically expressed as a range. For example, 3.5x to 4.5x EBITDA. This gives owners flexibility depending on negotiation strength, deal terms, and buyer fit.
Step 6 — Reviewing With Your Broker
Your business broker will walk you through the report, highlight improvement areas, and discuss timing. Often, small changes in bookkeeping or operations can increase your valuation by 10–20%.
The Bottom Line
A valuation isn’t a guess, it’s a data-driven analysis that positions you for a successful sale.