Business Valuation
What is business valuation?
Business valuation is the process of estimating what a business is worth. Owners use it before selling, bringing in a partner, raising capital, or planning an exit. The result is an estimate, and different methods and assumptions produce a range, not a single exact figure.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps financial statements clean and consistent, so the earnings a buyer or appraiser reviews are earnings you can defend.
The three common approaches
- Income approach: value the business by the cash flow it is expected to produce, discounted to today
- Market approach: compare the business with similar companies, often using a valuation multiple of earnings or revenue
- Asset approach: add up the value of assets and subtract liabilities
Many small service firms are valued with a market approach based on a multiple of adjusted earnings, often cross-checked with an income approach.
Worked example
The figures below are illustrative. A firm reports EBITDA of $350,000. A buyer adjusts for a $30,000 one-time legal cost and $20,000 of owner pay above market rate, giving adjusted EBITDA of $400,000. At a multiple of 3.5, the estimated value is $1,400,000. Actual multiples vary widely by industry, size, growth, and the stability of revenue, so this is only an illustration of the mechanics.
What drives the value
- Quality and consistency of earnings, including clean, well-documented books
- Recurring or contracted revenue compared with one-off projects
- Client concentration, owner dependence, and staff stability
- Working capital levels, covered under net working capital
For industry detail, see dental practice valuation metrics, medical practice valuation, property management company valuation, and consulting firm valuation. To get ready, read how to prepare your books for a sale or valuation.
Frequently asked questions
What is the most common way to value a small service business?
Many small service firms are valued by applying a multiple to adjusted earnings, with the multiple reflecting size, growth, and risk. Buyers often cross-check with an income approach. The adjustments, such as removing one-time costs and normalizing owner pay, usually matter as much as the multiple itself.
Do I need a formal appraisal?
A formal appraisal from a credentialed valuation professional is usually advisable for a sale, a buy-sell agreement, financing, or a dispute. A multiple-based estimate is useful for planning and early conversations. This page is general information and is not a formal valuation or financial advice.