How to Value a Business: Methods and Steps

What Does Valuing a Business Mean?

Valuing a business means estimating what it is worth at a specific point in time. It is not a fixed price - it is a range, built using recognized financial methods, that reflects both what the business owns, what it generates, and what comparable buyers have paid for similar businesses.

Valuation comes into play in many contexts: sale or acquisition, investor entry into equity, family succession, disputes between partners, or simply to make better strategic decisions.

Three Main Valuation Methods

In practice, professionals use three complementary approaches. Each responds to a different logic - combining them is best practice to obtain a reliable range.

1. Discounted Cash Flow (DCF) Method

The DCF method (Discounted Cash Flow) is the gold standard for investment banks and M&A advisors. It projects future cash flows over 5 to 7 years, adds aterminal value representing flows beyond the horizon, and discounts everything using a discount rate (the WACC) reflecting company risk.

Advantage: captures the company's specific trajectory - growth, investments, future profitability. It is the most precise method for an SME with an atypical profile.
Limitation: highly sensitive to assumptions. A 1% change in discount rate can shift valuation by 15 to 25%.

2. Comparable Multiples Method

Apply a sector multiple to a financial metric. The most common for SMEs:

• EV/EBITDA: enterprise value relative to EBITDA. The multiple typically ranges 4x to 12x depending on sector and size.
• EV/Revenue: useful for unprofitable companies or high-growth SaaS.
• P/E (Price/Earnings): less used for private SMEs.

Advantage: fast, grounded in M&A market reality.
Limitation: multiples are averages. An SME heavily dependent on its founder, or with high customer concentration, deserves a significant discount.

3. Asset-Based (Net Asset) Method

Sum the market value of all company assets (real estate, equipment, inventory, cash, receivables) and deduct liabilities. It gives the "floor" value - what the business would be worth if liquidated.

Advantage: simple, tangible, useful for asset-heavy businesses (manufacturing, trade, real estate).
Limitation: does not capture intangible asset value - expertise, customer base, brand, recurring revenue. A services company can be worth 3x its net asset value.

Which Method to Choose Based on Your Situation?

Five Steps to a Rigorous Valuation

1. Restate the accounts - Normalize non-recurring items (gains, exceptional charges), owner perks, and unusual rents. The goal is to obtain normalized EBITDA reflecting true operating profitability.
2. Choose the right discount rate - The WACC must be calibrated by sector, company size, and specific risks (founder dependency, customer concentration, cyclicality). For an SME, it typically ranges from 10% to 18%.
3. Build 5-year projections - Growth and margin assumptions must be documented and defensible. The buyer will challenge them. Prefer conservative projections with optimistic/pessimistic scenarios.
4. Calculate terminal value - It often represents 60 to 80% of total value. TheGordon-Shapiro formula or Exit Multiple are the two standard approaches. Verify terminal value does not exceed 80% of enterprise value - a signal the model relies too much on the distant future.
5. Move from EV to Equity Value - Enterprise Value is not what you pocket. Deduct net debt (financial debt - cash) and off-balance obligations to get Equity Value, which is the value of equity.

Enterprise Value vs Equity Value: Don't Confuse Them

This is the most frequent mistake. Valuation produces two distinct figures:

• Enterprise Value (EV) - the total economic value of the business, as if entirely financed by equity. This is what DCF calculates.
• Equity Value - the value of shares, what the shareholder actually receives. EV − net debt = Equity Value.

For an SME with €2M debt and €500k cash, an EV of €5M gives an Equity Value of €3.5M. This is the figure that matters in negotiation.

Cost of a Professional Valuation

A valuation by an accountant or M&A advisor costs between€3,000 and €15,000 depending on complexity. For an initial estimate or to prepare these discussions, tools like ValorSME deliver a complete DCF valuation with scenarios in minutes, for free.

The Expert Report PDF (€149) provides structured analysis you can use as a basis for discussion with your accountant or M&A advisor. To go further, consult our guide on valuation before sale or our article on valuing SaaS businesses if you operate in the tech sector.