How to Value a Business — The Three Approaches #
How to value a business comes down to three fundamental approaches, each answering a slightly different version of the same question: what is this company worth?
| Approach | What It Measures | Best For |
|---|---|---|
| Income-Based | What the business earns (EBITDA, cash flow) | Profitable operating businesses |
| Market-Based | What comparable businesses sell for | Industries with active M&A |
| Asset-Based | What the business owns minus what it owes | Asset-heavy or distressed businesses |
The income approach dominates because it answers the buyer's real question: how much money will this business put in my pocket? A restaurant generating $400K in annual EBITDA at an industry multiple of 4× is worth approximately $1.6M in enterprise value — regardless of what the furniture and equipment cost.
The critical variable in every valuation is the industry-specific multiple. A 4× multiple in restaurants reflects thin margins and high risk. A 15× multiple in software reflects recurring revenue and scalable economics. Using the wrong multiple — or a generic cross-industry average — is the single most common valuation mistake.
EBITDA Multiples — The Standard Method #
The most widely used business valuation formula is: Enterprise Value = EBITDA × Industry Multiple.
Why multiples vary by industry:
- Software/SaaS (15–25×): Recurring revenue, low marginal costs, high scalability
- Healthcare services (8–12×): Regulated demand, aging demographics, steady cash flows
- Professional services (5–8×): Relationship-dependent, moderate scalability
- Restaurants (3–5×): Thin margins, high labor costs, location-dependent
- Construction (3–5×): Cyclical, capital-intensive, project-based revenue
Industry-specific multiples require two data sources: public company financials from SEC EDGAR (to calculate actual EV/EBITDA ratios) and NAICS classification from Census Bureau (to define the industry boundary). VantaInsights reports include competitive landscape and market sizing data that provides the context for industry-appropriate valuation.
Want the full how to value a business data?
Complete data with 5-year forecasts, geographic breakdowns, and competitive analysis. Every data point sourced and cited.
Revenue Multiples and When to Use Them #
Revenue multiples — Enterprise Value divided by annual revenue — are used when EBITDA is negative or unreliable, most commonly for early-stage, high-growth, or pre-profit businesses.
| Metric | When to Use | Limitation |
|---|---|---|
| EV/EBITDA | Profitable businesses with stable earnings | Meaningless if EBITDA is negative or volatile |
| EV/Revenue | Pre-profit or high-growth businesses | Ignores profitability — a $10M business losing money values the same as one earning 20% margin |
| Price/Earnings (P/E) | Publicly traded companies | Distorted by capital structure and tax differences |
Revenue multiples are common in technology, biotech, and other sectors where companies deliberately sacrifice current profitability for growth. A SaaS company at 8× revenue with 40% year-over-year growth is valued on its trajectory, not its current earnings.
For most small businesses — restaurants, professional services, construction, retail — EBITDA multiples are more appropriate because these businesses are valued on what they earn today, not what they might earn in five years.
Industry Data That Drives Valuation #
Business valuation doesn't happen in a vacuum. The industry context — growth trajectory, competitive structure, wage trends, and market concentration — directly affects what multiples buyers are willing to pay.
| Industry Factor | Impact on Valuation | Data Source |
|---|---|---|
| Industry growth rate (CAGR) | Higher growth → higher multiples | Census CBP, Census SUSB |
| Market concentration (CR4) | Concentrated → more defensible → higher multiples | Census Economic Census |
| Wage trends | Rising wages → margin pressure → lower multiples | BLS QCEW |
| Establishment trends | Declining count → consolidation → higher for survivors | Census CBP |
| Industry life cycle | Growth stage → premium; decline → discount | Employment CAGR vs. GDP (FRED) |
A buyer conducting due diligence will check these industry metrics before closing. VantaInsights reports provide market sizing, CAGRs, competitive landscape, SWOT analysis, and industry forecasts from Census Bureau, BLS, FRED, and SEC EDGAR — the same data professional appraisers use to justify industry-specific multiples.
Common Valuation Mistakes #
| Mistake | Why It's Wrong | How to Fix It |
|---|---|---|
| Using a generic multiple | Restaurant and software multiples differ by 4–5× | Use NAICS-specific multiples from comparable transactions |
| Ignoring industry trends | A $500K EBITDA in a declining industry is worth less | Check employment and establishment CAGRs |
| Confusing revenue with profit | Revenue multiples on profitable businesses undervalue them | Use EBITDA for established, profitable businesses |
| Skipping normalization | Owner compensation, one-time expenses distort EBITDA | Normalize for market-rate owner salary and non-recurring items |
| Valuing in isolation | Company financials without market context miss structural risks | Always pair financial valuation with industry analysis |
The normalization issue deserves emphasis. Small business EBITDA often includes below-market owner compensation (owner takes $80K but a replacement manager costs $120K) or above-market perks (personal expenses run through the business). Normalizing EBITDA to reflect true operating economics is essential before applying any multiple.