TL;DR: Professional standards recognize three ways to value a business: the income approach, the market approach, and the asset approach. The first two price your earnings; the third prices what you own. For a profitable going concern, earnings set the value. Assets take over when the business is a holding entity, is winding down, or earns less than a fair return on what it owns. Smart sellers know both numbers before going to market, because the higher one usually sets the floor.
Ask what your business is worth and you will get two very different answers depending on where the appraiser looks. One method starts with your profit and asks what a buyer would pay for that income stream. The other starts with your balance sheet and asks what your assets would bring in the open market. In fifteen years of selling businesses across the Gulf South, I have watched owners leave real money behind because they only knew one of those two numbers.
This guide explains how each approach works, what the current market data says, and the specific situations where each one governs.
Key Takeaways
- Valuation standards recognize three approaches: income, market, and asset (AICPA Statement on Standards for Valuation Services No. 1).
- For operating companies, earnings usually drive value: Main Street deals price on SDE multiples, lower middle market deals on EBITDA multiples.
- Asset-based valuation governs for holding entities, liquidations, and businesses earning below a fair return on their assets.
- The two numbers together frame your negotiation: the asset value is typically the floor, the earnings value the going-concern case.
What are the three approaches to valuing a business?
Every credentialed valuation starts from the same three approaches: the income approach, the market approach, and the asset approach. The IRS Business Valuation Guidelines state it directly: “The three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach,” and the appraiser must consider all three before selecting what fits (IRS Internal Revenue Manual 4.48.4).
The AICPA’s valuation standard, SSVS No. 1, uses the same taxonomy, and NACVA’s professional standards align with it. Here is the practical translation for an owner:
- Income approach: value the future earnings the business will produce, either by capitalizing a normalized earnings figure or discounting projected cash flows.
- Market approach: value the business against what comparable companies actually sold for, expressed as a multiple of earnings or revenue.
- Asset approach: value the business as the sum of its parts: assets restated to market value, minus liabilities.
Notice that the first two both rest on earnings. That is why owners can usefully collapse the decision into one question: will a buyer pay for my profits, or for my property? The rest of this article answers that question.
Citation capsule: Professional valuation standards recognize three approaches to value: income, market, and asset (AICPA SSVS No. 1; IRS IRM 4.48.4). The income and market approaches both price a company’s earnings, while the asset approach prices its net assets restated to market value. Appraisers must consider all three and select the approach that best indicates value for the specific company and purpose.
How earnings-based valuation works
Earnings-based valuation prices your company as a stream of future profit. The appraiser normalizes your earnings through recasting, then applies either a market multiple from comparable sales or a capitalization rate that reflects the company’s risk. For most operating businesses, this is how the market actually prices deals.
The earnings measure changes with company size. Main Street businesses (up to roughly $5M in revenue and about $2M in EBITDA) price on seller’s discretionary earnings (SDE), which adds the owner’s full compensation back to profit. Lower middle market companies (roughly $5M to $150M in revenue with more than about $2M in EBITDA) price on EBITDA, which assumes a market-rate manager stays in the seat. Same company logic, different starting line.
The current data shows how steeply the multiple climbs with size. Deals under $500,000 posted a median multiple of 2.3x SDE, while deals between $5M and $50M posted a median of 5.5x EBITDA (IBBA / M&A Source Market Pulse, Q2 2025). Across all closed small-business sales, the average cash-flow multiple was 2.7x (BizBuySell Insight Report, Q1 2026). The Q1 2026 Market Pulse found multiples holding steady into this year, with slight gains in the $500K to $2M bands and 83% of deals over $5M attracting three or more offers (IBBA / M&A Source, Q1 2026).
This is also how professionals behave in practice: 76% of business appraisers use recast EBITDA multiples, the most of any multiples method, and guideline company transactions carry the largest single weight among valuation methods at 33% (Pepperdine Private Capital Markets Report, 2025).
How asset-based valuation works
Asset-based valuation prices the business as the market value of everything it owns, minus everything it owes. The appraiser restates each balance-sheet line to current market value: equipment at replacement or auction value rather than depreciated book value, inventory at realizable value, real estate at appraised value, and any unrecorded liabilities brought onto the ledger.
Two versions matter to a seller:
- Adjusted book value (going concern): assets restated at market value assuming the business keeps operating. This is the usual form for asset-heavy companies.
- Liquidation value: what the assets would bring in an orderly or forced wind-down, net of selling costs. This is the true floor beneath every other number.
The trap in book value is that depreciation schedules are tax documents, not market evidence. A fleet of well-maintained excavators can be nearly written off on the books yet worth seven figures at auction. The opposite happens too: obsolete inventory carried at cost can be worth pennies. An asset approach done properly replaces accounting fiction with market fact.
When does each approach apply?
The decision rule is older than most businesses being sold today. IRS Revenue Ruling 59-60, still the foundational authority on valuing private companies, says that for companies selling products or services, “earnings may be the most important criterion of value,” while for investment and holding companies the appraiser gives greatest weight to the assets underlying the security (Rev. Rul. 59-60, Sec. 5).
| Your situation | Primary approach | Secondary check |
|---|---|---|
| Profitable going concern (services, distribution, contracting, retail) | Earnings-based | Asset value as the floor |
| Asset-heavy but profitable (equipment rental, trucking, machining) | Earnings-based | Asset value, watched closely; it can approach the earnings value |
| Earning below a fair return on assets | Asset-based | Earnings value confirms the shortfall |
| Real-estate or investment holding entity | Asset-based | Income from the assets |
| Wind-down or liquidation | Asset-based (liquidation value) | None; the floor is the number |
The subtlest row is the third. When a company earns less than a fair return on the assets it employs, the earnings math produces a value below what the assets would bring on their own. At that point no rational seller accepts the earnings number, and the asset approach takes over. A buyer is no longer buying an income stream; they are buying property with a business attached.
Citation capsule: Revenue Ruling 59-60 sets the governing rule: operating companies that sell products or services are valued primarily on earning capacity, while investment and holding companies are valued primarily on underlying assets (Rev. Rul. 59-60, 1959-1 C.B. 237, Sec. 5). A business earning below a fair return on its assets shifts from the earnings camp to the asset camp, because its net asset value exceeds its value as an income stream.
The partner buyout that started at four times the real number
I recently advised an owner here in the Gulf South who was negotiating to buy out his business partner. The partner came to the table with a number nearly four times what the business was actually worth. His math was simple, and simply wrong: take an earnings-based value at a market multiple, then add every asset the business owned on top of it. The vehicles, the equipment, the inventory, all of it, stacked onto the earnings figure as if they were a separate purchase.
This is one of the most common valuation misconceptions I encounter, and it comes from a reasonable place. The assets are real, the partners paid real money for them, and a buyer would spend real money to replace them. But an earnings-based value already includes the operating assets. The trucks, the shop, and the inventory are the engine that produces the earnings; a multiple of earnings is the price of that engine’s output with the engine included. Adding the assets on top charges the buyer twice for the same dollar of profit. It is either or, not both: for an operating company, earnings set the value or assets do, whichever governs, and the table earlier in this article tells you which camp you are in.
The one asset that can legitimately sit on top is company-owned real estate, because it is a non-operating asset: the business does not have to own its building to earn its profits, it could just as easily lease the same space at a market rent. That is why real property is valued separately and added to, or carved out of, the deal. Equipment is different. The trucks and machines a company needs to operate as a going concern cannot be leased away from the earnings they produce, so they stay inside the earnings-based value. That distinction is exactly what had misled the partner into treating every asset like the building. Once we ran a proper valuation with both approaches side by side, the valuation was based on an earnings-based number, and the partnership negotiated on math instead of emotion. (Details are a composite and identifying facts have been changed.)
What this means for your sale price
Know both numbers before anyone else does. The gap between your earnings value and your asset value is information: a wide gap in favor of earnings means buyers are paying for goodwill, the transferable advantages that outlive any one machine. A narrow or inverted gap means the market will price your property, and your negotiation should start there.
This is also why the same company can deserve two different valuations at two different moments. Improve margins for two years and the earnings approach rewards you at a multiple. Let earnings drift while the fleet holds value, and the asset floor quietly becomes your best argument.
Our valuation practice runs both calculations on every engagement, using the NACVA framework covered in our complete owner’s guide to business valuation. If you want a rough sense of where you stand first, start with our 10-minute self-assessment, and remember that either path depends on properly recast financials to be credible.
FAQ
What is the difference between asset-based and earnings-based valuation?
Earnings-based valuation prices a company as a stream of future profit, using multiples of SDE or EBITDA or discounted cash flows. Asset-based valuation prices the company as the market value of its assets minus its liabilities. Operating companies usually sell on earnings; holding entities, liquidations, and under-earning companies are valued on assets (Rev. Rul. 59-60).
What multiple of earnings is a small business worth?
Recent data puts the median at 2.3x SDE for deals under $500,000 and 5.5x EBITDA for deals between $5M and $50M (IBBA / M&A Source Market Pulse, Q2 2025), with the average cash-flow multiple across closed small-business sales at 2.7x (BizBuySell, Q1 2026). Your specific multiple depends on transferability, customer concentration, and earnings quality.
Is a business worth more than the value of its assets?
A healthy operating business usually is. The excess of its earnings-based value over its net asset value is goodwill: the customer relationships, trained workforce, systems, and reputation a buyer cannot buy at auction. When that excess disappears, the asset value becomes the relevant number and the sale conversation changes.
When should you use asset-based valuation instead of a multiple of earnings?
Use the asset approach when the company is a real-estate or investment holding entity, when it is winding down, or when it earns less than a fair return on the assets it employs. In each case the assets, not the income stream, are what a buyer is actually purchasing.
How do you value a business that is not profitable?
Start with the asset approach: assets restated to market value minus liabilities, which typically sets the floor. If the losses are recent and fixable, a buyer may also pay something for the turnaround story, but the credible anchor in negotiation is the net asset value, not a projection.
Conclusion: run both numbers, then go to market
The three approaches are not academic categories; they are the difference between anchoring a negotiation correctly and negotiating against yourself. A profitable going concern should lead with its earnings story. An asset-rich company with soft earnings should lead with its floor. Either way, you should know both numbers, defensibly calculated, before the first buyer conversation.
That is exactly what a valuation engagement produces, and it is where every Duran process starts: within the first weeks, you know what the market will think before the market gets a vote. If you want both of your numbers run by a credentialed valuator, book a free valuation consultation.
Joel F. Duran has 15+ years of M&A and business brokerage experience and holds the CM&AA, M&AMI, CM&AP, CEPA, CVGA, CVB, CAIM, and CMSBB designations. Duran Advisors serves upper Main Street and lower middle market businesses across the Gulf South, including New Orleans Metro, the North Shore, Baton Rouge, Houma-Thibodaux, and South Mississippi. Examples in this article are composites and do not reference any specific client.
Continue Learning
- Business Valuation: The Complete Owner’s Guide
- What’s My Business Worth? A 10-Minute Self-Assessment
- Recasting Financial Statements
- What Buyers Actually Pay For: 16 Levers
- Duran valuation services
Sources
- IBBA / M&A Source, Market Pulse Survey Q2 2025 (Aug 2025). https://www.prnewswire.com/news-releases/the-ibba-and-ma-source-release-the-market-pulse-q2-2025-survey-302523561.html
- IBBA / M&A Source, Market Pulse Survey Q1 2026 (Jun 2026). https://www.prnewswire.com/news-releases/the-market-pulse-survey-q1-2026-reports-the-latest-trends-in-business-sales-up-to-50m-302813653.html
- BizBuySell, Insight Report Q1 2026 (Apr 2026). https://www.bizbuysell.com/insight-report/
- Pepperdine Graziadio Business School, 2025 Private Capital Markets Report (2025). https://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/18/
- AICPA, Statement on Standards for Valuation Services No. 1 (VS Section 100). https://www.aicpa-cima.com/resources/download/statement-on-standards-for-valuation-services-vs-section-100
- IRS, Internal Revenue Manual 4.48.4, Business Valuation Guidelines. https://www.irs.gov/irm/part4/irm_04-048-004
- IRS, Revenue Ruling 59-60, 1959-1 C.B. 237.