How to Appraise a Business
Paul Cronin
March 6, 2024 ⋅ 10 min read
This article was originally written in March 2024 and has since been updated with new discoveries and research in October 2025.
Most owners approach valuation at a pivotal moment, so clarity matters. At its simplest, a business appraisal is an estimate of the business’s worth for a specific purpose, using supportable methods and documented inputs.
Owners usually blend an asset-based valuation, an income-based approach, and a market-based valuation, then reconcile a final number that holds up under scrutiny. This guide shows how to appraise a business with plain-English steps, simple examples, and practical tips you can use right away.
You will find a straightforward checklist and a memo template mentioned throughout. Keep them nearby as you work, because they help you make informed decisions and create an accurate valuation you can explain to potential buyers or lenders.
What Is a Business Appraisal?
Before we get into mechanics, let’s anchor the why. Owners seek appraisals to price a sale, resolve a partner buyout, support lending, plan succession, or meet legal or tax requirements. The use case shapes the valuation process and the standard of value you apply.
There is also a difference between an internal company valuation you use to set expectations and a certified appraisal used when a lender, court, or tax authority will rely on the report. If a formal party is in question, bring in a qualified professional. If you need a primer first, start with a clear definition of what a business appraisal is.
The Three Core Methods of a Business Appraisal and When Each Fits
Every appraisal compares three lenses. The asset-based method looks at total assets and liabilities today.
The income-based approach focuses on future cash flows and present value. The market approach compares you to precedent transactions and comparable company analysis to infer enterprise value. You will likely use more than one, because each method shines a light on different drivers of a business’s worth and keeps you honest.
Asset-Based Approach
The asset-based valuation tallies tangible assets at adjusted market values, identifiable intangible assets where evidence exists, and all liabilities, including working capital items. It is most useful for asset-heavy companies or as a floor for capital-light service firms.
A common pitfall is relying on book value when equipment has appreciated, or ignoring intangible assets like intellectual property, a strong customer base, or valuable contracts. Missing intangibles exaggerate the gap between asset value and income value.
Income Approach
Income methods translate future profits into today’s value. There are two practical paths. For steady firms, the capitalization of earnings involves using a single earnings level and an earnings multiplier. For firms with changing cash flow, a basic discounted cash flow method projects three to five years of future cash flows and a terminal value, then applies a discount rate to calculate present value.
Normalize earnings before you apply any multiple or rate. This involves adjusting for owner compensation, one-time costs, and related party items, and then building an SDE (seller’s discretionary earnings) and an EBITDA worksheet from clean financial statements.
Market Approach
Market-based valuation sets the price by reference to market conditions. You select comps by size, industry, and business model, then look at valuation multiples on revenue, SDE, or EBITDA. Quality screens matter. Favor recency, proximity of size, and a close business model match.
Use a wide dataset to avoid cherry picking, then remove obvious outliers and stale comps that no longer reflect current industry standards. Market data serves as a sanity check against your income work and signals what potential buyers are actually paying for small businesses in your niche.
Quick method comparison:
Method: Asset-Based Valuation
Best for: Asset-heavy firms; liquidation floors
Primary inputs: Adjusted tangible assets, identifiable intangible assets, total liabilities, working capital
Strengths: Concrete; balance-sheet grounded
Watch outs: Book-value distortions; missing intangibles
Method: Income-Based Approach
Best for: Stable or forecastable firms
Primary inputs: SDE or EBITDA, growth rate, discount rate, cash-flow analysis
Strengths: Ties value to future cash flows and profits
Watch outs: Overly aggressive growth assumptions
Method: Market-Based Valuation
Best for: Firms with robust comps
Primary inputs: Valuation multiples on revenue/SDE/EBITDA; precedent transactions
Strengths: Reflects actual market pricing
Watch outs: Outliers; stale or mismatched comps
Step-by-Step: How to Appraise a Business
This is a practical sequence owners can run in a week or two.
Each step has a clear deliverable so your documentation can travel from diligence to deal:
Clarify the purpose and standard of value
Write down the use case and whether you are seeking fair market value or investment value.
Deliverable: a one-page scope note.
Assemble financials for three years plus TTM
Pull the income statement, balance sheet, and cash flow statement, plus a simple customer concentration view. Accurate inputs produce accurate valuation.
Deliverable: a clean financial packet.
Normalize earnings
Adjust for owner compensation, one-time items, and related party transactions. Build both SDE and EBITDA to keep options open for earnings multiplier analysis.
Deliverable: an SDE and an EBITDA worksheet.
Select the primary method
Choose the income-based approach for stable cash flows, the market approach when comp data is strong, and the asset-based valuation when the business is asset-heavy or you need a floor.
Deliverable: a short rationale paragraph.
Run the method
For capitalization of earnings, apply a supportable multiple to normalized SDE or EBITDA. For discounted cash flow analysis, outline three to five years of future cash flows, a modest terminal value, and a simple discount rate that matches risk.
Deliverable: a calculation sheet.
Cross-check with market multiples
Use at least two bases, for example, SDE and EBITDA. Explain any gaps in plain English and note how comparable company analysis supports your range.
Deliverable: a one-table cross-check with two or three comps.
Account for working capital and non-operating items
Confirm the level of working capital included in the price, and adjust for excess cash or non-operating assets.
Deliverable: an adjustments list.
Consider discounts and premiums only if relevant
Note any minority discounts or control premiums only if the use case requires them and you have support.
Deliverable: a short note on whether any apply and why.
Write an appraisal memo
Summarize method, inputs, comps, adjustments, and the final indicated range that a reasonable buyer and seller could accept.
Deliverable: a concise memo template you can reuse.
If you want to estimate the scope and budget for formal work, Baton’s overview of business appraisals and a transparent breakdown of appraisal costs can help you plan.
Simple Examples Owners Understand
Examples make the numbers feel real. These two illustrate common scenarios and show how to bridge methods without turning your memo into a math test.
Example 1: Stable Services Firm Using Capitalization of SDE
Assume a stable services firm with a normalized SDE of $600,000 and strong retention. A reasonable earnings multiplier of 2.6 suggests an indicated value of $1,560,000 under the income-based approach. A quick comp check on SDE multiples for similar small businesses supports the numbers’ neighborhood and gives confidence that the valuation process is on track.
Example 2: Light Growth Product Firm Using an EBITDA Multiple Plus a DCF Sanity Check
Assume a light growth product company with normalized EBITDA of $400,000 and clean books. A range of 4.0 to 5.0 times EBITDA indicates $1,600,000 to $2,000,000 for enterprise value using market-based valuation.
A simple discounted cash flow method, with three years of modest growth and a conservative terminal value discounted to present value, lands inside that range. The cross-check keeps both buyer and seller aligned on a realistic pricing corridor.
Inputs That Move Value the Most
Before you debate multiples, look at the levers that shift value.
These inputs commonly drive the spread between a low and high outcome:
Customer concentration and renewal risk
Recurring revenue share and contract terms
Gross margin trend and its drivers
Owner dependency and depth of the team
Working capital efficiency and terms with key accounts
Backlog, pipeline, and growth potential you can substantiate
Equipment age and maintenance history
Compliance, clean books, and audit readiness
Local market conditions and competitive intensity
A short audit of these items often reveals quick wins that sharpen your company's valuation and improve the perceived value of your business.
Mistakes That Skew Appraisals
Even experienced operators trip over the same issues.
You can avoid these with a half-page checklist:
Using net income when SDE or EBITDA is needed
Selecting comps by industry only and ignoring size and model
Double-counting owner add-backs or missing them entirely
Ignoring working capital and non-operating items
Relying on one method without a cross-check
A disciplined pass through these pitfalls protects you from avoidable surprises and supports a more accurate valuation.
When to Hire a Professional Appraiser
There are moments when a certified report is the right tool. Triggers include SBA lending, ESOP feasibility studies, partner disputes, divorce, estate planning, or complex intangible assets like patents and trademarks. Expect a structured process: A data request, management interviews, a draft report, review, and a final report, with clear timelines and defined deliverables.
If you are deciding between paths, compare a formal appraisal to a practical pricing exercise by reading "Business Appraisal vs. Valuation." Baton can also help you prepare sale-ready financials and a market pricing range so you know when a certified opinion is appropriate.
Normalizing Adjustments and Market Comps: What Matters Most
Two themes change outcomes more than owners expect. First, owner compensation normalization has an outsized impact.
If Owner A pays a $250,000 salary and Owner B takes a $150,000 salary plus a $100,000 draw, proper normalization values them the same. Failing to adjust can depress value by roughly $300,000, depending on your multiple, which is a high-impact miss for small businesses.
Second, comp selection works best with volume and triangulation. Combine proprietary data with extensive third-party datasets to build robust comp sets, then perform a sanity check using many comps rather than just a few. Use recency, size, proximity, and business model fit as your first filters, then drop outliers instead of forcing them into the average.
FAQs About Appraising a Business
Before we wrap, here are quick answers to the questions owners ask most as they learn how to appraise a business. Use this section to sanity check your approach, clarify terms, and avoid common missteps that can skew value. If a topic raises a new question, note it for your appraisal memo so your reasoning stays clear and defensible.
What Is the Difference Between Appraisal and Valuation?
An appraisal is a formal, certified opinion of value used for regulated or legal purposes. At the same time, valuation is a broader term for estimating the value of a business for decision-making or pricing.
Which Method Usually Fits Small Service Businesses?
Income methods tied to SDE or EBITDA typically fit best because they capture cash generation, then you cross-check with market multiples.
How Do You Calculate SDE Correctly?
Start with pre-tax earnings, add back a market-rate owner compensation, interest, taxes, depreciation, amortization, and legitimate one-time or non-operating items, then double-check against bank statements.
Can You Appraise a Business With Fewer Than Three Years of Financials?
Yes, but you must rely more on present value from a conservative discounted cash flow analysis and give extra weight to asset-based valuation and careful comps.
Do You Need a Certified Appraisal to List a Business for Sale?
No. You can list with a well-supported valuation process and a clear memo, though SBA loans and legal matters often require a certified report.
How Do You Choose the Right Multiple for Your Business?
Normalize earnings first, then use comparable company analysis and precedent transactions to bracket a range. Reconcile the range with your firm’s growth rate, risk profile, and quality of financial statements.
Get a Pricing Range and Plan Your Exit With Baton
If you want a quick, defensible starting point, Baton offers a free valuation that benchmarks your financials against market data, highlights where normalization will make a difference, and outlines a sale readiness plan. You also receive buyer matching insights and a pricing range so you can hold a confident conversation with advisors and acquirers.
When you are ready, get a business valuation and get clarity on appraisal cost so you can move forward with less guesswork.