A real business valuation isn't a gut number. Business appraisers run multiple different types of valuation analyses to arrive at a fair market value for a business.
We typically see these types of valuation methodologies:
Income approach (capitalizing your normalized earnings or using discounted cash flow models)
Market multiple approach (multiples from comparable sales)
Asset value approach (asset heavy business may look at the replacement cost of equipment)
Appraisals typically calculate a valuation price using multiple methodologies and then provide an opinion of value based on the different approaches. In reports we've reviewed, those methods often land within a few percent of each other.
As a financial planner working with business owners, here's the thing we tell owners: the cash flow and stability of the business is what matters to the buyer.
This is the part owners always underestimate. No appraiser values your business off the profit on your tax return. They normalize it first.
Normalizing means adjusting your books to show what the business really generates for a buyer. They strip out above-market owner salary, personal expenses run through the business, one-time costs, and family members on payroll who don't actually work there. In one practice valuation we reviewed, those adjustments swung adjusted earnings by tens of thousands a year, and the owner's discretionary earnings came out far higher than reported net income. That's the thing: The cleaner your add-backs, like documented personal expenses, the more defensible your value.
There are typically three formal methods we see in valuations. A good appraiser considers all three, then applies the ones that fit best. Often, they come to very similar numbers.
| Approach | What it does | Best fit |
|---|---|---|
| Income | Capitalizes or discounts normalized cash flow using a risk-based rate | Stable, predictable earnings |
| Market | Applies multiples from databases of comparable real sales | When good comparable data exists |
| Asset | Restates tangible and intangible assets, including goodwill, to market value | Asset-heavy businesses, or to split out goodwill |
For context, the overall 2025 average across more than 9,500 reported transactions was about 2.5x SDE, with most small businesses landing between 2x and 4x (BizBuySell via Sundance). No single method rules. You triangulate to find a reasonable price that can be negotiated upon by buyers and sellers.
The income method is the one that does most of the heavy lifting in valuation reports.
You take a sustainable level of earnings, subtract a normalized income tax, adjust for depreciation and capital spending to get distributable cash flow, then divide by a capitalization rate. That cap rate is really just a risk score. In the reports we reviewed, it was built up from a risk-free Treasury rate, an equity risk premium, a small-company premium, and a company-specific add-on, landing around 15%.
So, a business generating about $150,000 in sustainable cash flow, divided by a 12% cap rate, lands near $1.3 million. More risk means a higher cap rate, and a higher cap rate means a lower value (past performance does not guarantee future results).
Now, capitalizing one steady number works fine when earnings are stable. But what if the business is still growing? That's where the discounted cash flow method comes in.
Instead of one sustainable number, you project cash flow out year by year, usually five (sometimes longer), then discount each year back to today's dollars using a discount rate. That discount rate is basically the same risk score as the cap rate, just with the growth added back in. Then you add a terminal value for everything past year five.
A discounted cash flow model is likely a better fit for a business that shows more growth or has large expenditures out in the future. Again, the assumptions are going to drive the numbers so it's critical they make sense.
Here's what surprises a lot of owners of services businesses. Most of what you're selling isn't equipment, it's your reputation, name brand, customer relationships, processes, and other intangible items. We call those things goodwill.
In one dental practice valuation we reviewed, goodwill, the covenant not to compete, and patient records made up 85% of the value. Net fixed assets were only 13%, and supplies were 1%, so the chairs and equipment barely moved the needle. What a buyer pays for is the going concern, the customer base, and the reputation. That's why reducing how much the business depends on you matters so much before a sale.
The goal isn't one magic figure. It's a range you can stand behind across more than one method.
When those independent methods land on similar numbers, you've got a value that holds up in a negotiation and in front of a lender.
It's a lot simpler than it feels right now. You just need clean normalized earnings, an honest read on risk, and a sense for the prices paid in the market for similar businesses.
A business purchase or sale can have major implications on your personal financial future.
To understand how your business or practice value connects to your personal financial plan, book an introduction call below.
Sundance Financial Group — https://sundancefg.com/resources/sde-multiples-by-industry
BizBuySell — https://www.bizbuysell.com/learning-center/industry-valuation-multiples/
Disclosure
The content and information presented herein are for educational purposes only and should not be construed as a solicitation or offer to buy or sell any investment services. Nothing contained in this material should be considered an offer to provide any product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. The information contained herein has been obtained from sources believed to be reliable; however, the Firm does not guarantee accuracy or completeness of the information. Such information is subject to change at any time without notice. Before taking any action, you should consult with a qualified tax, legal, or financial professional.