What is a business valuation?
Dylan Gans
January 26, 2026 ⋅ 5 min read
Selling a business often starts with a deceptively simple question: “What am I worth?” A business valuation is how you answer that question in a way a buyer, lender, or advisor can pressure-test, not just nod along to.
If you want the number to hold up later (when diligence begins), it helps to understand what a valuation is actually measuring, and why two “reasonable” valuations can land in different places.
What a Business Valuation Is Really Measuring
Most of the confusion around valuation stems from treating it as a single number. In reality, it’s a structured argument: A range, backed by evidence, that explains why your business should command a certain price in today’s market.
At a high level, a valuation is trying to measure:
Earning power (how much cash the business can reliably produce)
Risk (how fragile those earnings are)
Transferability (how well the business runs without you)
Market context (what similar businesses have sold for recently)
That’s why valuation is tightly connected to seller prep. A clean, repeatable operation doesn’t just feel nicer; it usually reduces perceived risk, and risk is what moves multiples.
The Three Common Valuation Approaches Buyers Use
If you’ve ever heard wildly different opinions on value, it’s often because people are using different lenses. Most serious buyers triangulate across multiple approaches, even if they have a favorite.
The Market Approach
At its core, this approach asks: what do businesses like mine actually sell for? The answer comes from real transactions, usually framed as a multiple of SDE or EBITDA.
It’s useful because it reflects real market behavior. It’s also easy to misuse if you rely on generic “industry multiples” without matching for size, margin profile, concentration, location, and trendline.
If this feels confusing, our overview of how to value a business breaks down comps and multiples in a seller-friendly way.
The Income Approach
This approach values the business based on its future cash flows, adjusted for risk. In smaller deals, you may not see a full-blown discounted cash flow model, but the logic is still there: Reliable cash flow, with less risk, supports a higher price.
Income approaches tend to matter more when:
The business is growing quickly
Margins are unusually strong or unusually weak
The buyer is underwriting debt and needs the cash flow to “make the math work”
In other words, the income approach shows up most when the buyer is trying to answer one core question: “How confidently can this business produce the cash flow I’m counting on after the handoff?”
The Asset-Based Approach
This is about what the business owns, net of liabilities. It shows up most in asset-heavy businesses, distressed situations, or when earnings are inconsistent.
For most healthy owner-operated businesses, an asset-based approach is a floor, not the headline.
What Actually Moves the Number Up or Down
There are many factors that influence how a business is valued, and they don’t all carry equal weight. The following levers tend to have the biggest impact on where the number ultimately lands.
Quality of Earnings
Clean financials are not about perfection; they’re about credibility. If your statements are consistent and your add-backs are clear, your valuation story stays intact longer.
If you want to get more concrete here, our breakdown of seller’s discretionary earnings (SDE) is the simplest way to align your numbers with how small business buyers actually evaluate cash flow.
Customer Concentration and Retention
A business with one dominant customer can still sell, but the buyer will price in the risk. Contracts, renewals, retention data, and a diversified customer base all reduce the “single point of failure” feeling.
Owner Dependence
If the business relies heavily on you for its processes, relationships, and decisions, that dependence becomes a risk for buyers. Strong managers, documented workflows, and a believable transition plan can protect value more than a last-minute revenue push.
Trendline and Proof
Buyers pay for what they can verify. A steady upward trend with clear drivers usually lands better than a big projection that depends on “once I have more time.”
What to Prepare Before You Ask for a Valuation
Valuation goes faster (and lands more credibly) when you can answer buyer-style questions without scrambling. Before you request a number, gather what you’d want if roles were reversed.
Start with:
Financials: Last 3 years P&Ls, current YTD P&L, balance sheet.
Tax returns: Last 2 to 3 years.
Add-backs: A short explanation for each normalization item (owner comp, one-time expenses, discretionary spend).
Operations snapshot: Headcount, key roles, customer mix, major vendors, core systems.
Contracts and commitments: Leases, major customer contracts, material vendor agreements (if they exist).
Why Valuations Change After You Get One
It’s frustrating to hear one number early, then feel it wobble later. Most valuation shifts are not random; they’re reactions to new information.
Common reasons include:
New comps enter the market, and multiples move
Financial performance dips (or spikes) and needs context
Diligence uncovers concentration, churn, or undocumented processes
Deal structure changes what the seller actually nets
If you want a practical “what happens next” view, our walkthrough of the business valuation process does a good job connecting the valuation to readiness and go-to-market decisions.
For a more formal perspective on valuation factors (especially for closely held businesses), the IRS’s Revenue Ruling guidance is a useful reference point, even if you are not valuing for tax purposes.
A Practical Next Step That Doesn’t Lock You In
A valuation should create options, not pressure. Once you have a credible range, you can decide whether to improve the business for six months, test the market, or map a sale timeline that fits your life.
If you want a starting point grounded in how small businesses transact, Baton’s business valuation provides a defensible baseline you can actually use in planning.