This page explains how to value a business using professional valuation methods trusted by buyers and lenders.A well-supported business valuation is one of the most important steps in preparing for a successful sale.
It establishes a credible price range, builds early trust with buyers, supports lender readiness, and reduces friction during negotiations. Just as importantly, it gives owners a fact-based understanding of the company they have built and what qualified buyers are willing to pay in the current market.
Owners rely on assumptions or industry “rules of thumb,” but a formal valuation replaces guesswork with clear data and professional analysis. Understanding your true market value allows you to set realistic expectations, plan ahead, and move into the sale process with more confidence and fewer surprises.
The summary below outlines how valuations work, what influences value, and the types of valuation products available.
Every valuation, no matter the size or industry, ultimately answers three questions:
Recasted SDE or EBITDA after normalizing owner benefits and non-recurring expenses. These adjustments remove personal or unusual expenses so a buyer can see what the business will realistically earn under new ownership.
Buyers assess customer concentration, recurring revenue, team depth, lease terms, and how dependent the business is on the owner. Lower risk typically supports stronger offers.
Comparable transactions help confirm whether the valuation aligns with what real buyers have paid for similar businesses in the same industry and size range.
When combined, these inputs determine the multiple, or the price a buyer is willing to pay relative to earnings.
How Buyers Think About Value
Buyers view your business through a simple equation:
Business Value = Income Stream × Risk of That Income Continuing
or
Business Value = Income Stream × Market Multiple
Risk and multiples move inversely.
Lower risk commands higher multiples, while higher risk pushes them down. Buyers also apply a practical test to determine whether the business can support their goals. They want to know if the company can service acquisition debt, cover ongoing capital expenditures, pay the owner a market salary, and still provide an acceptable return based on the perceived risk.
A defensible valuation helps underwriting.
If the business does not meet these thresholds, buyers adjust their offers or may decide not to proceed. A defensible valuation demonstrates to buyers and lenders that the business can support these expectations, which strengthens offers and eases underwriting.
The Three Primary Valuation Approaches
Valuations rarely rely on a single formula. They incorporate several approaches to create a balanced and reliable conclusion.
1. Asset Approach
Values furniture, fixtures, equipment, inventory, and working assets at fair market value.
Best for asset-heavy companies or businesses with lower earnings.
This method focuses on tangible resources and is commonly used when profitability is inconsistent.
2. Market Approach
Compares the business to completed transactions within the same industry, size range, and geography.
Best for owner-operator and lower middle market companies.
This approach is trusted because it reflects actual buyer behavior across North America.
3. Income Approach
Projects future earnings and applies a capitalization or discount rate to determine value.
Best for stable and profitable businesses with predictable cash flow.
Lenders and more sophisticated buyers rely heavily on this approach because it focuses on sustainability and future performance.
Most valuations blend more than one method for accuracy and credibility.
What Drives Value Up or Down
Even well-run businesses can be undervalued if key areas are not addressed.
Value Drivers That Increase Multiples
Consistent year-over-year earnings
Growth opportunities and strong demand
Stable management and team depth
Diversified customers and vendor base
Assets, equipment, and well-kept operations
Documented processes and strong recurring revenue
Limited customer concentration
Factors That Decrease Value
Customer concentration
Declining financial trends
Weak or unreliable cash flow
High owner dependency
Poorly run back office
Unclear reporting or inconsistent records
Legal exposures or lingering issues
High customer churn
Understanding these drivers allows owners to improve value before going to market.
Why a Third-Party Valuation Matters
A third-party valuation brings credibility, accuracy, and confidence to the sale process. It separates the value of what you have built from personal bias and supports lenders and buyers as they evaluate risk.
Most importantly, it helps you avoid common pricing mistakes. Many owners either overprice their business and lose qualified buyers, or underprice it and leave money on the table. A professional valuation helps set a realistic range and supports stronger negotiations and fewer surprises during due diligence.
Valuation Options Available Through Murphy Business
Murphy Business offers valuation tools to fit different needs, industry categories, and complexity levels.
Option 1: Essentials Valuation Report
A basic valuation package that includes key value drivers and a summarized valuation conclusion. Best for owners who want a starting point before a full sale or lender process.
Option 2: Standard Valuation Report
Includes deeper financial analysis, benchmarking, and support documentation. Often used when preparing to sell or to support lender qualification.
Option 3: Certified Valuation Report
A formal valuation used when a certified level of detail is needed. Often used for legal, divorce, tax planning, or more complex transactions.
Why Valuation Is the First Step in a Successful Sale
A valuation is more than a number. It creates the factual foundation for a strategic sale process. It helps pricing strategies, supports buyer confidence, reduces lender friction, and improves negotiation leverage. It also helps you make smarter decisions about what to fix or improve before bringing the business to market.
Ready to get a valuation?
Click “Request a Valuation” to start. If you have questions, call us and we can walk you through the next steps.
