Jane Tereba | September 25, 2025
For years, Cap Val has been vocal about the shortcomings of simple “earnings x a multiple” valuations. We’ve written – and advised clients – around the conviction that a business’s true worth can’t be reduced to a market multiple applied to last year’s earnings. I still believe that. But experience has a way of refining even our strongest convictions.
Recently, through conversations with business brokers and firsthand work with owners preparing for a sale, I’ve come to appreciate that market multiples have their place. They’re not a shortcut to replace disciplined analysis, but they do offer high-level insights when you’re deciding if now is the right time to sell, or if you want to reality-check a strategic plan against current buyer appetite.
This isn’t a 180-degree reversal. Think of it as moving from “never” to “nuanced.”
- The income approach is anchored in cash flow forecasting, risk assessment, and value drivers and remains the foundation for understanding what a business should be worth.
- Transaction multiples is grounded in actual deals and shine when you need to know what the market will currently pay.
Recognizing when each method matters doesn’t weaken the rigor of professional valuation; it strengthens it. Business owners deserve both perspectives so they can build value confidently and time their exit wisely.
In this Story Behind the Numbers blog, I unpack the differences between these approaches, their strategic uses, and how to combine them to make better decisions.
When business owners decide to explore selling their company, one of the first questions they ask is: “What’s my business worth?” The answer depends entirely on who you ask—and more importantly, which valuation methodology they use.
Recently, I’ve had several conversations with business brokers that highlighted a fundamental difference in how we approach business valuation. As valuation analysts, we use the income approach, diving deep into detailed business plans, cash flow projections, and strategic positioning to determine what your business should be worth. Brokers, conversely, rely primarily on transaction multiples—examining what similar businesses have sold for to estimate what the market will currently accept.
Neither approach is inherently superior. Both serve a purpose and provide valuable insights for business owners. Understanding when and how to use each method can mean the difference between maximizing your exit value and leaving significant money on the table.
The Income Approach: What Should Your Business Be Worth?
The income approach treats your business as an investment vehicle, similar to how financial analysts evaluate stocks or real estate. This method asks a fundamental question: Based on this company’s ability to generate future cash flows, what should a rational investor pay for it today?
How Valuation Analysts Apply the Income Approach
The income approach involves several critical components that create a comprehensive picture of business value:
Detailed Cash Flow Analysis: We examine your historical financial performance, but more importantly, we project future cash flows based on your business plan, market conditions, and competitive positioning. This isn’t simply extrapolating last year’s numbers—it’s a thorough analysis of your business’s earning potential under various scenarios. Our scenario modeling offers rich insight to business owners about how to increase the value of their business, whether they plan to sell in a year or ten years.
Risk Assessment and Discount Rate Determination: Every business faces unique risks that directly impact its value. We evaluate operational risks, market risks, financial risks, and management dependency to determine an appropriate discount rate. A stable, diversified business with strong management systems receives a lower discount rate than a volatile, owner-dependent operation.
Growth Projections and Market Analysis: We analyze your business plan to understand realistic growth expectations. This includes examining your addressable market, competitive advantages, capital requirements, and execution capabilities. We don’t just accept growth projections at face value—we stress-test them against market realities.
Terminal Value Calculations: For ongoing businesses, we estimate value beyond our detailed projection period, using a sustainable growth rate based on the business’s long-term prospects.
The result is a valuation grounded in fundamental business economics—what your business should be worth given its ability to generate returns for investors over time.
Strategic Advantages of the Income Approach
The income approach provides several key benefits for business owners:
Value Driver Identification: The process reveals exactly what drives your business value. You’ll understand which operational improvements, strategic initiatives, or market expansions could have the greatest impact on valuation. We can also help you identify resources to increase these drivers of value.
Forward-Looking Perspective: Rather than relying solely on historical performance, this approach considers your business’s trajectory and future potential. It accounts for planned improvements, market trends, and strategic positioning.
Customized Analysis: Every business receives individual attention. The valuation reflects your specific circumstances, competitive position, and growth opportunities rather than generalized market trends.
Enhancement Roadmap: The detailed analysis provides a clear roadmap for value-building initiatives you can implement before going to market or simply to improve long-term business performance.
Transaction Multiples: What Will the Market Accept?
Transaction multiples represent the market reality of business sales. This approach examines recent sales of comparable businesses and applies similar valuation multiples to your company’s financial metrics.
How Brokers Use Transaction Multiples
The transaction multiple methodology follows a systematic process:
Comparable Transaction Research: Brokers identify businesses similar to yours that have sold recently, looking at factors like industry, size, growth rate, profitability, and geographic location.
Multiple Calculation and Analysis: They determine the relationship between sale price and key financial metrics (typically revenue, EBITDA, or seller’s discretionary earnings) for these comparable transactions.
Market Multiple Application: These multiples are then applied to your business’s financial metrics to estimate current market value.
For example, if similar businesses in your industry have recently sold for 3-5 times EBITDA, your business, generating $500,000 in EBITDA, might be valued at $1.5-2.5 million using transaction multiples.
Benefits of the Transaction Multiple Approach
Transaction multiples offer important market insights:
Current Market Reality: This approach reflects what buyers actually pay in today’s market, not theoretical values. It provides real-time insight into buyer appetite and market conditions.
Speed and Efficiency: Transaction multiples can be calculated relatively quickly, making them useful for initial valuations, market checks, or preliminary discussions with potential buyers.
Negotiation Context: Understanding current market multiples provides valuable context during negotiations and helps establish realistic expectations for both buyers and sellers.
Liquidity Assessment: This approach helps gauge how readily your business might sell in the current market environment and what pricing strategies might be most effective.
Important Caveat: While transaction multiples are grounded in real deals, they inherently assume a level of comparability that rarely exists in practice. No two businesses are identical – differences in management depth, customer concentration, intellectual property, growth trajectory, and competitive positioning can add or detract significant value. Relying solely on multiples risks oversimplifying these unique factors and treating businesses as if they were commodities.
The Critical Distinction: Should vs. Will
The fundamental difference between these approaches comes down to one key distinction: the income approach tells you what your business should be worth based on its economic fundamentals, while transaction multiples indicate what the market will currently pay.
This distinction carries significant strategic implications. Markets can be inefficient, particularly for middle-market businesses where information flow is limited and buyer pools are smaller. Economic conditions, buyer availability, industry sentiment, and seasonal factors can cause transaction multiples to deviate substantially from fundamental values.
Consider this scenario: Your business generates strong, predictable cash flows and operates in a growing market with sustainable competitive advantages. The income approach might indicate your business should be worth $3 million based on its fundamental earning power and growth prospects. However, if your industry is currently out of favor with buyers or economic conditions have tightened lending, transaction multiples might suggest a market value of only $2.2 million.
Neither valuation is incorrect—they answer different questions. The income approach tells you the business should command $3 million based on its economic characteristics and future potential. The transaction multiple approach suggests that in today’s market conditions, buyers will pay $2.2 million.
When to Use Each Approach
Smart business owners leverage both methodologies strategically, understanding when each provides the most value:
Optimal Uses for the Income Approach
Long-Term Strategic Planning: When you’re not selling immediately but want to understand value drivers and enhancement opportunities, the income approach provides the strategic framework you need to build value systematically.
Investment Decision Evaluation: Before making major capital expenditures, acquisitions, or strategic initiatives, the income approach helps evaluate their impact on fundamental business value.
Pre-Sale Preparation: Understanding your business’s intrinsic value provides crucial negotiating intelligence and helps you make informed decisions about timing, pricing, and deal structure.
Partnership and Legal Transactions: For buy-sell agreements, estate planning, or legal proceedings, the income approach provides defensible valuations based on economic fundamentals rather than market sentiment.
Strategic Applications for Transaction Multiples
Market Timing Assessment: When considering a sale within 12-18 months, transaction multiples help gauge current market conditions and buyer appetite for businesses like yours.
Pricing Strategy Development: Understanding market multiples provides essential context for setting asking prices, evaluating offers, and negotiating deal terms.
Broker Evaluation: Current market multiples help assess whether brokers’ preliminary estimates are reasonable and grounded in recent market activity.
Quick Market Reality Checks: For rapid assessments or preliminary discussions, transaction multiples offer useful benchmarks without extensive analytical investment.
Strategic Implications for Business Owners
Understanding both approaches provides several strategic advantages:
Enhanced Timing Decisions: If transaction multiples currently fall below fundamental value, you might delay a sale or focus on value enhancement initiatives. Conversely, if multiples exceed fundamental value, market timing becomes critical.
Focused Value Enhancement: The income approach identifies specific initiatives that will increase fundamental value, while transaction multiple analysis reveals which improvements matter most to current buyers.
Informed Negotiation: Understanding both perspectives provides powerful negotiating intelligence. You’ll recognize when offers reflect fair fundamental value versus current market constraints.
Comprehensive Exit Planning: Long-term exit planning should focus on building fundamental value through income approach insights, while short-term sale preparation must consider transaction multiple realities.
The Professional Valuation Advantage
While understanding both approaches proves valuable, professional valuation analysis provides benefits that extend far beyond simple number calculations.
A comprehensive valuation performed by qualified analysts delivers:
Objective Third-Party Perspective: External valuation removes emotional bias and provides an honest assessment of your business’s strengths, weaknesses, and improvement opportunities.
Detailed Supporting Documentation: Professional valuations include comprehensive analysis and documentation that prove invaluable during negotiations, due diligence, and stakeholder discussions.
Strategic Business Insights: The valuation process often reveals opportunities and risks that owners haven’t fully considered, providing a fresh perspective on business operations and strategy.
Enhanced Credibility: Third-party valuations carry significant weight with buyers, lenders, investors, and other stakeholders in ways that internal estimates simply cannot match.
Performance Benchmarking: Professional valuations provide baselines for measuring improvement initiatives and tracking value creation over time.
Making Informed Decisions
Both the income approach and transaction multiples provide crucial insights for business owners, but they serve different purposes in your strategic toolkit. The income approach helps you understand and systematically build fundamental value, while transaction multiples help you navigate current market realities and timing considerations.
Successful business owners use both methodologies strategically. They focus on building fundamental value through income approach insights while staying informed about market conditions through transaction multiple analysis. This dual perspective enables better decision-making about timing, pricing, and strategic initiatives.
However, if you’re seriously considering selling your business, the most valuable starting point is always a detailed valuation performed by a qualified valuation analyst. This comprehensive analysis provides the foundation for all subsequent decisions—whether you choose to sell immediately, implement value enhancement initiatives, or adjust your timeline based on market conditions.
The investment in professional valuation analysis pays dividends throughout your exit planning process. You’ll negotiate from a position of strength, make informed strategic decisions, and maximize the value you’ve worked years to build.
Your business represents one of your most significant assets. Understanding its true value—and the factors that drive that value—is essential for making the right decisions at the right time. Start with fundamental analysis, stay informed about market conditions, and make decisions based on a comprehensive understanding rather than incomplete information.
