Ask three people how to value a small business and you'll hear three different answers. A broker talks about multiples. An accountant might mention discounted cash flow. A banker cares about something narrower: whether the cash flow covers the loan payment. These are the three business valuation methods you'll run into as a buyer, what each one is for, and which one does the real work when the business is one you'll run yourself.
Appraisers work from three valuation methods. The market approach compares a business to similar sales, usually as a multiple of SDE. The income approach projects future cash flow. The asset based approach totals assets minus liabilities. For most small, owner-operated businesses, the market approach sets the price, and the other two matter mainly for larger or asset heavy deals.
What are the three business valuation methods?
| Method | What it does | Who relies on it |
|---|---|---|
| Market approach | Prices the business as a multiple of SDE, built from what similar businesses have sold for | Brokers and most small business buyers |
| Income approach | Projects future cash flow and discounts it to a present value | Larger or professionalized deals, appraisers |
| Asset based approach | Totals tangible assets minus liabilities | Asset heavy businesses, liquidations, distressed sales |
Each one answers a different question. The market approach asks what buyers paid for businesses like this one. The income approach asks what the future cash flow is worth today. The asset based approach asks what the business would be worth if you sold off everything it owns. A buyer doesn't need all three in equal depth, but it helps to know which one is doing the work on any given deal.
Why does the market approach decide most small business deals?
The market approach wins by default for one practical reason: the data exists. Thousands of small businesses change hands every year, and survey groups like the International Business Brokers Association's Market Pulse survey track what they sold for. That gives a buyer or broker a real number to divide the price by SDE and compare against.
A credible income approach needs the opposite: years of clean, growing, forecastable cash flow. Most small sellers can't produce that. The books are often a mix of personal and business expenses, the owner is the one running the place, and next year's number is largely a guess. So the market approach steps in as a workable shortcut, usually expressed as the 3x to 4x SDE range covered in what's a fair multiple for a small business.
Want the due-diligence checklist that verifies the numbers behind any multiple? It's free, along with 40 questions to ask a seller.
Get the free guidesWhen does the income approach (DCF) apply?
A full discounted cash flow model is rare on a Main Street deal, for the same reason a bank won't take a seller's five-year projection at face value: there isn't enough history to trust it. The income approach shows up more often above a few million dollars in value, or for a business with contracted, recurring revenue that makes a forecast defensible, like a service company with multi-year government or corporate contracts.
For most small business purchases, the lender runs a simpler version of the same idea: instead of discounting five years of projected cash flow, they test whether this year's earnings, after a replacement salary, cover this year's loan payment by a safe margin. We cover that test in the SBA loan reality check, and you can run it on any listing with the 60-second lender-math check.
When does the asset based approach matter?
The asset based approach matters most when the earnings don't tell the whole story. A business that's losing money, or barely breaking even, can still be worth something for its trucks, equipment, inventory, or real estate. In a liquidation, it's the only method that applies, since there's no ongoing cash flow left to value.
For a healthy, profitable service business, the asset based number is usually a small fraction of the asking price, which is normal. The price mostly reflects the cash flow and the customer relationships, and the trucks barely move the number. Run the asset based approach anyway, as a floor check. If it comes out close to or above the price the other methods support, that's worth a second look at why.
A worked example: one landscaping business, three methods
A landscaping company is listed at $650,000, with the seller claiming $180,000 of SDE.
Market approach. $650,000 divided by $180,000 is a 3.6x multiple. The median for deals between $500K and $1M was about 2.8x in the IBBA's Q1 2026 survey, so this one sits above the middle of the range. That alone doesn't disqualify the deal, but it's worth a closer look at what justifies the premium.
Asset based approach. The trucks, mowers, and trailers come to roughly $140,000 at replacement value, against about $20,000 of payables, for net tangible assets of around $120,000. That's a fraction of the $650,000 ask, which is expected for a service business. It confirms the price is a bet on the cash flow the business produces, and the equipment barely figures into it.
Lender math (the income approach's practical cousin). At 10% down, the loan is $585,000. On a 10-year SBA loan at the 9.75% rate that size of loan carries, the payment comes to about $7,650 a month, or $91,800 a year. Budget $75,000 to replace the owner with a working manager, which leaves $105,000 of the $180,000 SDE to cover the loan. That covers the payment 1.14 times, just under the 1.15 floor most SBA lenders use. You can run the same inputs through the lender-math check.
Three methods, one practical answer: the multiple is a little rich, the assets confirm this is a cash flow purchase, and the cash flow itself falls just short of covering the loan. At these terms, the price is too high. For the full checklist on pushing back on a price like this, see how to tell if a business's asking price is too high.
Which method should decide your offer?
Use the market approach to screen the price against what similar businesses sold for. Run the asset based number as a floor check, mostly to confirm the cash flow is carrying the price instead of equipment nobody priced in. Then let the lender math have the final word, since it's the test that decides whether you can close the deal at all. The full valuation walkthrough puts all three steps in order.
The SBA's own guide to buying an existing business makes the same point in fewer words: understand the cash flow and do your due diligence before you commit to a price.
FAQ
Which valuation method do business brokers use?
Most brokers price a small business off the market approach: a multiple of SDE drawn from what similar businesses have sold for. It runs on real transaction data, and most sellers can't produce the kind of multi-year forecast a different method would need.
Is discounted cash flow (DCF) ever used for a small business?
Rarely. A DCF needs a reliable, multi-year cash flow forecast and a discount rate, and most small sellers don't have the clean, growing numbers to support one. It shows up more often above a few million dollars in value, or for a business with contracted, recurring revenue.
When does the asset based approach decide the price?
Mainly for asset heavy or struggling businesses, where the equipment or real estate is worth more than the earnings justify, or in a liquidation. For a healthy service business, the asset based value is usually a small fraction of the asking price, and that's normal.
Can I use more than one valuation method on the same deal?
Yes, and you should. Check the multiple against similar sales, run the lender math to see if the cash flow covers the loan, and treat the asset based number as a floor check. A deal that looks fine on one method can still fail on another.
Scope reads the listing and the financials, runs the multiple, the asset check, and the lender math, and tells you which methods a given asking price survives before you spend a week on it.
Scope your first deal freeEducational content, not financial, legal, or tax advice for your situation. Confirm specifics with your own CPA and attorney.