How a Business Valuation Is Actually Done: A Step-by-Step Breakdown

Business valuations typically follow a defined set of steps. While the exact process may vary depending on the size and complexity of the business, this serves as a solid general guideline for most engagements.

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Step 1: Define What’s Being Valued and Why

Not all valuations are created equal. The first step is identifying exactly what is being valued and for what purpose. Are we valuing 100% of a company, or a 25% minority stake? Is it the shares, or just the assets and liabilities? These questions matter because ownership structure, control rights, and liquidity all impact value.

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For example, a 20% stake in a private company is usually worth less than 20% of the total business because it doesn’t come with decision-making power or easy resale options. The reason behind the valuation also shapes the approach. Valuing a business for a potential sale is different from doing so for succession, divorce, or shareholder planning.

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Step 2: Set the Valuation Date and Define “Value”

Every valuation needs a clear effective date. This anchors the analysis to a specific point in time, typically based on when the event (sale, gift, exit plan) is taking place. You also need to define the type of value being used. In the majority of cases, that’s fair market value, but other contexts (such as internal reorganizations) may call for different definitions.

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Step 3: Understand the Business Itself

Before choosing an approach, a valuator needs to develop a deep understanding of how the business works. That includes:

• The company’s operations, people, and structure
• Its customer base and revenue sources
• Owner involvement and dependencies
• Strength of management and internal systems

This is usually done through interviews, intake forms, financial reviews, and external research. The goal is to understand the business beyond just its numbers.

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Step 4: Analyze the Industry and Economic Environment

No business exists in a vacuum. External conditions such as industry trends, supply chain risks, regulatory shifts, and overall economic performance all influence valuation.

For example, a construction company operating during a real estate boom may be viewed more favorably than one operating in a contracting market with material cost pressures.

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Step 5: Review Financial History and Future Expectations

This is where analysis gets serious. The valuator will study:

• Historical financials (usually 3 to 5 years)
• Year-over-year trends and seasonality
• Normalized earnings (adjusted for one-time or owner-specific expenses)
• Projected revenues, margins, or growth (if available)

The goal is to form a reliable picture of what the business can generate going forward and how stable or risky that income might be.

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Step 6: Confirm Whether the Business Is a Going Concern

Next, the valuator determines whether the business is expected to continue operating in the foreseeable future. If the company is viable, a going concern valuation is used. If it’s being shut down, a liquidation approach might be more appropriate.

This impacts the entire methodology. Viable businesses are valued based on their ability to generate income and returns. Non-viable ones are valued based on what can be recovered from selling assets.

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Step 7: Select the Right Valuation Approach

There are three primary approaches used in business valuation:

• Income Approach – based on future cash flow or earnings

• Market Approach – based on comparable business sales or multiples

• Asset-Based Approach – based on the value of assets minus liabilities

The best approach depends on the business model, quality of financials, purpose of the valuation, and industry context. Depending on which valuation package you choose, your valuation may include just one, or all three approaches. See pricing for more details.

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Step 8: Choose the Method(s) Within That Approach

Each approach has multiple methods. For example:

• Under the income approach: Discounted Cash Flow (DCF) or Capitalized Earnings

• Under the market approach: Precedent Transactions or Guideline Public Company Method

• Under asset-based: Adjusted Net Asset Method

Some valuations may use multiple methods and reconcile the results.

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Step 9: Make Key Assumptions

Valuators use their professional judgment to make reasonable assumptions based on the information available. These include:

• Discount or capitalization rates
• Market multiples
• Owner salary normalization
• Growth expectations

All assumptions are documented in the report and directly impact the final value.

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Step 10: Calculate the Value or Range of Values

Using the selected approach, method, and assumptions, the valuator calculates a concluded value or a reasonable value range. This is typically a midpoint, but the report may include a high and low range to reflect uncertainty or sensitivity to assumptions.

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Step 11: Prepare the Final Report

Finally, all of this analysis is compiled into a valuation report. The depth of the report varies depending on the level of service:

• Lite reports offer high-level clarity
• Standard reports provide multiple methods and formal commentary
• Pro reports may include detailed risk analysis, sale support materials, and more

Each report is written in clear language and backed by data, method, and rationale.

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Why This Matters

Valuations aren’t just about numbers. They’re about trust, structure, and decision-making. Whether you're preparing for a sale, buyout, estate plan, or strategic planning, understanding how your valuation is built gives you confidence in the result.

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