Section two
Valuation methods
No single method settles what a business is worth. Each measures something different, and a defensible valuation usually applies two and explains the gap between them.
- 01Multiples of earnings
The multiple method takes a normalised earnings figure and applies a factor drawn from comparable transactions. It is the most used method in this market, and the most often misapplied.
- 02Discounted cash flow
Discounted cash flow builds value from expected future cash, discounted for time and risk. It is the most defensible method in theory and the most sensitive to assumptions in practice.
- 03Seller's discretionary earnings
Seller's discretionary earnings describes what a single working owner takes out of a business in total. It is the standard base for valuing small owner-operated companies.
- 04Asset based valuation
An asset based valuation adds up what the business owns and subtracts what it owes. It sets a floor rather than a market value, and it is the method of last resort for a trading company.
- 05Comparable transactions
Comparable transactions ground a valuation in what has actually been paid. The difficulty is that in this segment the data is thin, and the comparisons are rarely as close as they look.
A valuation prepared for a transaction is a range with reasoning attached, not a certificate. A structured valuation of an online business (https://www.businessforsale.eu/services/business-valuation) is one of the services offered by the platform behind this reference.