Business Valuation Methods Every Owner Should Know
October 16, 2025 · 4 mins
Business Valuation Methods Every Owner Should Know
Understanding what your business is worth is about more than just preparing for a sale, it’s about knowing where you stand, identifying growth opportunities and planning for the future.
At Confederation M&A, we help business owners uncover the true market value of their companies and understand the key drivers behind it. There are several ways to determine a company’s value, but not all approaches are created equal.
We’re breaking down the three primary valuation methods: Asset Value, Income Approach and Market Approach, and explain why the market method often provides the clearest and most practical picture of value.
1. Asset Value Approach
The asset approach calculates value based on the fair market value of a company’s tangible assets, such as equipment, property, or inventory, minus any liabilities.
It’s most effective for asset-heavy businesses, like construction companies with large fleets or real estate-based enterprises with significant holdings. It can also be used in liquidation scenarios, where assets are sold individually rather than as part of a going concern.
However, one of the main differentiators from other methods is that it doesn’t account for goodwill or intangible value: things like customer relationships, brand reputation, or intellectual property. For most established, profitable companies, those intangibles make up a large portion of the value. Therefore, the asset approach is more commonly used when there is no expectation of transferable goodwill.
2. Income Approach
The income approach looks at a company through the lens of its earning power (how much profit it can reasonably be expected to generate in the future). It’s most often used when the business has a proven track record and predictable cash flow or anticipated future cash flows.
There are a couple of ways to calculate value using this approach:
Discounted Cash Flow (DCF)
This method takes the company’s projected cash flows, usually forecasted over several years, and converts them into today’s dollars (present value) using a discount rate that reflects risk. It’s often used for businesses with strong growth prospects or proprietary products, where much of the value lies in what’s ahead rather than what’s already been achieved.
Capitalization of Earnings
Rather than relying on forecasts, this method starts with historical, normalized earnings and divides that figure by a capitalization rate that factors in size, industry, and overall risk. It’s more straightforward and grounded in actual results, but doesn’t always capture future growth potential as precisely as a DCF model.
Both methods help paint a picture of what a company is worth, however, they also involve a number of assumptions about things like growth, margins, and market stability, meaning results can vary depending on the inputs and purpose of the valuation.
3. Market Approach (The Method We Use Most Often)
The market approach looks outward, as well as inward. This method focuses on determining price based on What have similar businesses actually sold for?
This method uses data from completed transactions in the same or similar companies or related industries to establish a valuation multiple, typically applied to the company’s normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Those multiples can vary widely depending on a few core factors:
- The overall health of the industry and economy
- The size and stability of the company
- The stability of the company’s EBITDA
- The strength and depth of the management team
- Customer diversity, growth trajectory, and perceived risk
Because it’s grounded in real-world buyer behaviour, the market approach often produces the most practical, reality-based estimate of what a business could sell for today. It balances both the numbers and the nuances: the systems, brand, people, and reputation that give a company its true market appeal.
At Confederation M&A, this is the approach we rely on most often when helping owners understand, price, and position their business for a successful sale.
Bringing It All Together
Each valuation method serves a purpose, but for owners exploring succession, growth, or an eventual sale, the market approach offers the clearest insight into what the market will actually bear.
By understanding how buyers assess value, you can take proactive steps to strengthen your company’s position, whether through operational improvements, management depth, or risk reduction.
At Confederation M&A, our goal is to help owners see their business the way a buyer would and to use that insight to achieve the best possible outcome when it’s time to transition.
Trisha Mossey, Partner
trisha.mossey@confederationgroup.ca
