How to Value a Company: What is the best method to use?

Most business owners are unaware of their company's actual value. Not because they’re careless, but because business valuation feels like a moving target. Brokers quote wildly different numbers, online calculators oversimplify, and advice from friends or advisors often clashes with what the current market value actually supports.

This guide cuts through the noise. We’ll cover the three most-used business valuation methods, how to choose the right one for your business, and what really moves the sale value up or down. 

You don’t have to guess, Baton uses a blended, data-driven approach grounded in real buyer behavior and comparable sales, so you get an accurate valuation from day one. For a primer on the landscape, see Baton’s overview of business valuation approaches.

Why Company Valuation Matters More Than You Think

Valuation isn’t just a sticker price; it shapes every part of your deal. It influences your prospective buyers' pool, the deal terms, and how fast (or whether) a transaction closes. Think of valuation like the fulcrum of your process: Set it right, and momentum builds; set it wrong, and everything drags.

Here’s the cost of getting it wrong. Overpricing suppresses outreach and offers; buyers simply move on to similar companies priced in line with recent prices paid. Underpricing leaves hard-earned company equity on the table. 

In the real world, we see both scenarios: a seller lists at a high price, interest stalls for months, and they either reprice or sit out another year. A seller lists fairly, and healthy competition reduces time-to-close and improves terms. 

Independent industry tracking supports this finding: The IBBA’s Market Pulse Highlights consistently demonstrate how median multiples for Main Street and lower-middle-market businesses shift according to deal size and conditions, reminding sellers to base their decisions on market evidence rather than intuition.

The 3 Most Common Company Valuation Methods

There’s more than one way to estimate the value of your business. The right approach depends on factors such as size, systems, growth, and owner involvement. Below are the methods most buyers (and finance professionals) actually use.

1. SDE Multiples (Seller’s Discretionary Earnings)

Seller’s Discretionary Earnings (SDE) is the total financial benefit to a full-time owner-operator: Net income plus owner salary, perks, and legitimate one-time or non-recurring add-backs. In other words, it normalizes cash flow for an owner-run company, allowing buyers to compare similar businesses.

SDE is the most common yardstick for owner-operated companies (often under ~$1M–$2M revenue). Buyers typically apply an earnings multiplier (often around 2–3 times the SDE) that reflects risk, documentation quality, and industry norms. 

Directionally, industry surveys indicate that smaller deals command lower multiples than larger, more systematized ones; another reason to use the right yardstick for your size.

A simple example: If your SDE is $200,000, a 2–3x multiple implies a fair value of $400,000–$600,000 before discussing terms like seller financing or an earnout.

Practical notes we see often:

• Add-backs must be defensible. An owner's salary paid through payroll can be added back; an owner’s draw taken below the line cannot, buyers (and lenders) won’t accept it as part of cash flow analysis.

• Clean financial statements make or break your multiple. Good bookkeeping reduces perceived risk and improves the company’s financial standing in diligence.

• Baton standardizes SDE analysis across sub-$10M listings, ensuring that small differences in financial data don’t derail the valuation process.

For service companies in particular, SDE can be the most representative approach.

2. EBITDA Multiples and Cash Flow Valuation

Earnings before interest, taxes, depreciation, and amortization (EBITDA) strips out owner-specific items and accounting choices to highlight the recurring operating performance buyers are paying for. It’s common for companies to become more systematized and less dependent on the owner.

Companies with revenue of over $ 1 million, leadership beyond the owner, repeatable processes, and stronger reporting often transition from SDE to EBITDA in the conversation. In these cases, buyers underwrite the company’s ability to generate ongoing free cash flows with less reliance on a single person.

Typical private-market EBITDA multiples might range roughly from ~3–6x, with higher multiples for recurring revenue, growth visibility, and professional management. To understand how financing conditions and risk-return targets influence private deal pricing, refer to the Pepperdine Private Capital Markets Report (2024), which provides details on return expectations and capital availability across various private market segments. 

As a directional example, a company producing $1.5M of EBITDA with strong retention and expansion growth prospects could reasonably attract a 5x multiple, implying approximately $7.5M in enterprise value (subject to adjustments for debt, working capital, and other factors).

Even when buyers price off EBITDA, they’ll cross-check against comparable companies, comparable company analysis, and precedent transactions, especially in the middle market. Public comps anchor market capitalization, stock prices, and multiples; private comps show what buyers actually paid. For a rigorous overview of relative valuation and private-company adjustments, we recommend Aswath Damodaran’s 2024 valuation notes.

3. Asset-Based Valuation and Present Value of Assets

An asset-based approach starts with tangible assets (and sometimes intangible assets) minus liabilities to approximate book value. In a conservative scenario, liquidation value estimates the amount that assets would fetch in a forced sale.

This method is common for asset-heavy businesses, such as manufacturing, logistics, fleet-based operations, or distressed situations, where asset backing drives economic value more than earnings do. But it can miss intrinsic value tied to brand, customer relationships, and future revenue, so it’s rarely ideal for software or services.

A simple example: A construction firm with trucks, equipment, and inventory but slim profits might lean on asset value as a floor. In practice, buyers will still cross-check with earnings-based methods to ensure the current market will support the price.

Which Valuation Method Is Best for Your Company?

No single method wins every time. 

The right choice depends on four realities that buyers weigh instinctively:

• Business size and maturity: Smaller, owner-run companies tend to focus on SDE, while larger, more systematized companies tend to focus on EBITDA.

• Owner involvement: If you’re the rainmaker, operator, and head of sales, buyers price the role they’ll have to replace. Less owner dependence typically increases multiples.

• Revenue consistency and growth: Visibility into future growth, low churn, and documented pipelines raise confidence in future cash flows.

• Industry norms: Some niches trade off times revenue method benchmarks; others are strictly earnings-based. (Careful: revenue-only methods can lead to inaccurate valuation if margins are thin.)

Baton’s approach blends methods and weights them based on what we see prospective buyers actually using in successful deals. 

For example:

• A service firm with $300K SDE and low overhead is best valued on SDE (then cross-checked with comparable analysis).

• A B2B software company with $1.5M EBITDA, no owner involvement, and strong retention is better valued on EBITDA (then cross-checked against precedent transaction analysis and comparable companies).

In high-growth cases, such as early-stage companies or turnarounds with validated momentum, we’ll also examine discounted cash flow (DCF) analysis. The discounted cash flow method estimates intrinsic value by projecting future free cash flows and discounting them back at an appropriate discount rate. 

If you want a clear, textbook explanation of why lower discount rates increase present value, the Congressional Budget Office’s 2024 explainer lays it out cleanly.

What Actually Impacts Market Value And Company Worth

Here’s the short, practical checklist sellers can use to stress-test value without spreadsheets:

• Profitability quality: Durable cash flow raises multiples. If you’re asking how to grow valuation, start by increasing net cash generation and documenting it. A clean cash flow analysis consistently outperforms aggressive add-backs.

• Financial documentation: Organized, gap-free financial statements build credibility. Buyers (and lenders) rely on trust in numbers to sharpen prices and speed diligence. For context on lender documentation expectations in SBA-financed deals, see SBA SOP 50 10 lender policies and the SBA’s loan closing guidance, noting appraisal requirements.

• Owner dependence: The less the business revolves around you, the better. Create SOPs, delegate revenue-critical work, and reduce how much debt or payroll it would take to replace your role.

• Recurring revenue and concentration: Predictable contracts are powerful, but having one customer accounting for 80% of revenue can compress multiples or lead to more contingent terms. Structure can bridge gaps (e.g., earnouts tied to retention).

• Growth potential: Demonstrable future profits and a realistic growth rate, supported by pipeline data, capacity planning, and unit economics, can expand the multiple, not just the base earnings.

Ultimately, buyers pay for certainty, simplicity, and scalability. A business with clean financials, transferable operations, diversified revenue streams, and a credible growth path is far more valuable than one with messy books and excessive owner dependency. Treating these checklist items as ongoing disciplines, not just pre-sale fixes, helps protect today’s value and maximize tomorrow’s exit.

Company Valuation Changes With Market Conditions and Strategy

Your company’s fair value isn’t static. It shifts in response to the economic environment, interest rates, buyer activity, and the effectiveness of your story's packaging. 

When financing costs decline, buyers’ hurdle rates and discount rates decrease, which tends to increase present values and, by extension, valuation multiples.

Timing also matters. Strong trailing-12-month performance often improves your valuation range, because buyers underwrite what the business is doing now, not just what it did two years ago. 

Positioning matters just as much: Accurate valuation plus clean documentation, compelling comparable analysis, and targeted buyer outreach drive better sale value, which is why Baton combines technology with proactive marketing instead of waiting for inbound. 

We also keep you calibrated to reality. Online calculators often overlook nuance; legacy reports sometimes advocate for a number instead of testing actual demand. A useful valuation for an owner who wants to sell reflects what the market will actually pay, validated against live comps and buyer behavior, not just theory. 

You Don’t Need to Guess Your Company’s Market Value

There’s no universal “best” method to value a company. SDE, EBITDA, asset-based approaches, and DCF analysis each play a role, depending on factors such as size, systems, owner involvement, and growth. 

What you can control is how market-ready your numbers are and whether your advisor blends methods in a way that aligns with how real buyers think; grounded in comps, supported by documentation, and calibrated to the current market.

That’s why Baton starts with a rigorous, blended valuation and a transparent plan to get you to the closing table often at approximately one-third the cost of traditional brokers and with timelines that move 50% faster, thanks to technology and expert execution. 

If you’re still exploring the basics, here’s what is a business valuation and a quick guide to value a service business. If you’re ready to value business to sell and want a number you can stand behind, create a Baton Market account to start your free valuation, it’s fast, accurate, and grounded in real market data, not guesswork. 

Or, if you’re ready to sell your business, get in touch today. 

A Few Valuation Terms You’ll Hear (and What They Mean)

Valuing a business can sound like an alphabet soup of finance jargon, but at its core, it’s about answering one question: What is this company worth, and to whom? Different methods shed light from different angles, whether it’s looking at cash flow, comparable deals, or balance sheet anchors. 

Knowing the common terms and what they really mean can help you cut through the noise and understand how buyers, sellers, and investors think about value:

• Enterprise value vs. company’s equity: Enterprise value reflects the total value of the operations (commonly cross-checked against EBITDA multiples). Subtract how much debt (and add excess cash) to arrive at equity value, the money to the seller at closing, net of obligations.

• Comparable company analysis/precedent transactions: Price checks against comparable companies and real prices paid for similar companies, a cornerstone of fair pricing.

• Discounted cash flow (DCF): A projection of future cash flows (or future free cash flows) brought back to today using a discount rate; used to estimate intrinsic value and company’s fair value when growth is predictable.

• Revenue method/times revenue method: Sometimes used in niche markets, but best used as a cross-check; margins still rule.

• Book value/liquidation value: Balance-sheet anchors used as a floor in asset-heavy or distressed cases; they rarely capture the true value of a profitable, transferable going concern.

• Market checks: Public stock market data (multiples, market capitalization, stock prices) can inform private-company relative pricing, but private deals still price off private comps and cash flow.

No single valuation method tells the whole story. Each provides a lens, and together they form a clearer picture of what a company might realistically sell for. 

Whether you’re on the buy side, sell side, or just trying to make sense of the numbers, understanding these terms equips you to navigate the valuation conversation with more confidence and spot when the numbers really add up.