Ask ten business owners what their company is worth and you'll get ten different numbers — most of them pulled from the same shaky source: "my buddy sold his for 3x." That's not a valuation. That's a rumor.
The actual work of pricing a small business comes down to three methods. Appraisers use all three, weight them based on what fits the business, and triangulate toward a defensible number. If you're preparing to sell — or evaluating an offer you've already received — knowing these three methods is how you stop guessing and start negotiating.
The Three Approaches
Every valuation method is trying to answer the same question: what is this business worth to a buyer? They just come at it from different angles.
Market approach — what did similar businesses actually sell for? Income approach — what is the earning power of this business worth? Asset approach — what does the business own, minus what it owes?
You will almost never see all three produce the same number. That's not a flaw in the process. A 20 to 40 percent spread between methods is normal, and it's telling you something important about the specific business. Each method highlights a different slice of value.
Market Approach: What Comparable Sales Say
The market approach is the most intuitive. You look at recent sales of similar businesses, extract a multiple of revenue or earnings, adjust for differences, and apply that multiple to your own numbers. It works best for businesses under $1M where comp data actually exists.
The process is four steps. Find comps in databases like BizComps or DealStats. Adjust for size, location, growth rate, and customer mix — one comp may have sold to a strategic buyer who paid a premium, another may have had a long-term service contract that inflated its multiple. Calculate the adjusted multiple (price to revenue or price to EBITDA). Apply that multiple to your own financials.
Here's how that looks for a real example. You're valuing an HVAC company doing $850K in revenue. You find three recent comparable sales:
Company A: $800K revenue, sold for $1.2M (1.5x multiple) Company B: $950K revenue, sold for $1.5M (1.6x multiple) Company C: $700K revenue, sold for $900K (1.3x multiple)
After normalizing — Company B's higher multiple reflected a locked-in service contract — you settle on 1.5x as the adjusted market multiple. That puts your business at roughly $1.275M. Simple, data-driven, and grounded in what the market is actually paying.
Income Approach: Capitalizing the Cash
The income approach asks a different question: forget what other businesses sold for — what is this business's earning power worth on its own? The formula is:
Value = Annual Earnings / Capitalization Rate
The capitalization rate reflects the buyer's required return and the riskiness of the business. A stable, low-risk business might use a 0.25 cap rate — that's a 4x multiple. A riskier one might use 0.33 — a 3x multiple. The riskier the business, the higher the return a buyer demands, and the lower the price they'll pay for the same dollar of earnings.
Take a consulting firm with $250,000 in recasted annual earnings and an industry cap rate of 0.30. The value comes out to $250,000 ÷ 0.30 = $833,000. Or, framed the other way, $250,000 × 3.3 ≈ $825,000. Either way, that's the baseline the income approach produces before anyone negotiates up or down for growth, competitive position, or owner dependency.
This is also where improving the business pre-sale pays off disproportionately. Every additional $100K of recurring annual earnings adds $300K to $500K to the sale price, depending on the multiple. That's why owners who plan ahead obsess over profitability in the two years before going to market.
Asset Approach: What's on the Balance Sheet
The asset approach is the simplest. Add up what the business owns — equipment, inventory, vehicles, real estate — subtract what it owes, and that's your value.
Value = Total Assets − Total Liabilities
This method matters most for asset-heavy businesses: manufacturing, plumbing, landscaping, a dental practice with expensive equipment. For those, what's on the balance sheet is a big part of value.
For service and software businesses, the asset approach typically gives you a floor price that's far below what a buyer would actually pay. A consulting firm might have $50K in tangible assets and generate $500K a year in earnings — nobody's buying that for $50K. But the asset approach still earns its keep as a reality check. It tells you the liquidation value, which is the absolute minimum the business is worth.
Why the Methods Disagree (and What to Do)
The biggest mistake owners make is running one method, liking the answer, and ignoring the others. If the market approach says $1M and the income approach says $1.5M, that's not a problem to hide — it's information.
That gap is often telling you one of a few things. Maybe the market is being conservative relative to what your specific earnings justify. Maybe your recasted earnings are over-adjusted and won't survive due diligence. Maybe your assets are undervalued on the books. A good appraiser doesn't pick a winner — they explain the differences and weight the methods by what fits the business.
A practical rule of thumb:
- Under $1M with good comps — weight the market approach heavily.
- Over $1M or thin comp data — lead with the income approach.
- Asset-heavy businesses — include the asset approach as a real input, not just a footnote.
- Every business — run all three and understand why they diverge.
The Takeaway
There is no single formula for pricing a small business. Buyers and their appraisers will run all three methods, and sophisticated ones will use the gaps between them as negotiating leverage. The only way to hold your ground is to have already done the same work — understand what each method produces for your business, know why they differ, and be ready to defend the number you're asking for.
The owners who get blindsided on price are almost always the ones who walked in with a single number and no idea how it was built. Don't be one of them.
Ready to see what all three methods say about your business? Torch's valuation tools help you recast your earnings, pull comparable sales data, and build a defensible number before you ever sit down with a buyer.