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The most commonly used methods for valuing a company
There is no single, universally correct valuation method. There are four or five approaches, each answering a different question, and a serious valuation always combines several. Choosing the wrong method is the most frequent cause of a valuation that nobody believes.
Why several are combined
Each method looks at the company from a different angle: multiples look at what the market pays, discounted cash flow at what the company will generate, net asset value at what it owns, and comparables at what has been paid for similar businesses.
If they all point to a similar figure, the valuation is solid. If one of them diverges, that is a signal: there is something about the business that this method sees and the others do not. Investigating that discrepancy is often the most useful part of the exercise.
01. EBITDA multiples
What it is: applying to EBITDA a coefficient derived from comparable transactions in the sector.
When: established, profitable companies with stable results. It is the dominant method in the mid-market.
Advantage: quick, comparable and understandable for all parties.
Limitation: it assumes that your company is equivalent to the sector average. It does not capture growth, risk or intangibles.
Variants: sales multiple when there is not yet profitability, EBIT multiple when asset intensity differs greatly.
02. Discounted cash flow (DCF)
What it is: projecting the free cash flow of the coming years, discounting it to present value at a rate that reflects risk, and adding a terminal value.
When: companies with reliable forecasts and an understandable business model. It is the most conceptually correct method.
Advantage: the only one that explicitly incorporates growth and company-specific risk.
Limitation: extremely sensitive to two variables that are set by judgment: the discount rate and the perpetual growth rate. Moving the rate by one point can change the result by 20%. For this reason, it is always presented as a range, never as a single figure.
Warning sign: if 70% of the value lies in the terminal value, the model is not valuing the business, it is valuing an assumption.
03. Intangible asset valuation
What it is: identifying and quantifying what is not properly reflected on the balance sheet (brand, software, patents, client portfolio) through specific methods: replacement cost, relief-from-royalty or R&D cost.
When: technology companies, businesses with a strong brand or significant intellectual property. In many modern businesses, this is where most of the value lies.
Advantage: it provides a view of all the assets that add real value to your company. It is the only method that analyzes the company beyond its revenue and makes the invisible objective. Highly useful for innovative or technology companies.
04. Market comparables
What it is: identifying recent transactions of companies similar in size, sector and geography, and extracting the multiples applied.
When: sale and purchase processes and investment rounds.
Advantage: it reflects what the market is actually paying, today.
Limitation: in Spain, information on SME transactions is scarce. And high-profile comparables almost always include synergies that do not apply to your case.
05. Adjusted net asset value
What it is: starting from the book net equity and adjusting each asset and liability to its real market value.
When: asset-intensive companies (real estate, holding companies, industrial businesses with significant fixed assets) and liquidation situations.
Limitation: it ignores the ability to generate profits. A profitable service company can have almost zero net equity and be worth millions. Applying it there is a glaring mistake.
Summary table
Method | Ideal for | Risk of misusing it |
EBITDA multiples | Established, profitable companies | Ignores growth, risk and intangibles |
Intangible asset valuation | Technology, brand, intellectual property | Requires documentation and proof |
Discounted cash flow | Businesses with reliable forecasts | Highly sensitive to assumptions |
Comparables | Sales and investment rounds | Scarce data on SMEs |
Net asset value | Asset-intensive companies | Undervalues service businesses |
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