By Harry Prabandham · Updated September 28, 2026
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Business Valuation Methods: Income, Market, and Asset Approaches
Businesses are valued with income, market, and asset approaches, then adjusted for control and marketability. The purpose shapes the method.
Business Valuation Methods: Income, Market, and Asset Approaches
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Why would you need a business valuation?
- Sales and mergers, buy-sell agreements, gift and estate tax filings, divorce, and shareholder disputes all turn on value.
- Startups need a fair market value to set stock option exercise prices under Section 409A.
- The standard of value matters: fair market value for tax purposes can differ from what a strategic buyer would pay.
- IRS Revenue Ruling 59-60 lists factors appraisers weigh for closely held stock, including earnings, dividend capacity, goodwill, and comparable companies.
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Why would you need a business valuation?
- Sales and mergers, buy-sell agreements, gift and estate tax filings, divorce, and shareholder disputes all turn on value.
- Startups need a fair market value to set stock option exercise prices under Section 409A.
- The standard of value matters: fair market value for tax purposes can differ from what a strategic buyer would pay.
- IRS Revenue Ruling 59-60 lists factors appraisers weigh for closely held stock, including earnings, dividend capacity, goodwill, and comparable companies.
How does the income approach work?
- A discounted cash flow analysis projects future free cash flow and discounts it to today at a rate that reflects the business's risk.
- The terminal value, which covers years beyond the forecast, often makes up a large share of the result, so its assumptions deserve scrutiny.
- Capitalizing earnings divides one normalized year of earnings by a capitalization rate, which suits stable businesses.
- Small changes in growth or discount-rate assumptions can move the answer substantially.
How do the market and asset approaches work?
- The market approach compares the business with similar public companies or completed sales of similar private companies.
- Mid-size companies are often priced on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization).
- Smaller owner-run businesses are often priced on seller's discretionary earnings, which add back the owner's pay and perks.
- The asset approach values assets minus liabilities at fair market value and fits holding companies or businesses being wound down.
How do discounts for control and marketability work?
- A minority stake may be worth less per share than a controlling one because its owner can't direct decisions.
- A discount for lack of marketability reflects how hard it is to sell private company shares.
- The size of these discounts is fact-specific and frequently challenged by the IRS in gift and estate matters, so the analysis needs support.
How do 409A valuations work for startups?
- Options granted with an exercise price below fair market value on the grant date can trigger adverse tax under Section 409A.
- A valuation by a qualified independent appraiser, dated no more than 12 months before the grant, is presumed reasonable unless grossly unreasonable.
- A valuation can go stale sooner if a material event occurs, such as a new financing round.
- Common methods include backsolving from a recent financing and allocating value among share classes with option-pricing models.
When is a formal appraisal needed?
- Gifts of hard-to-value interests need adequate disclosure on the gift tax return, which can include a qualified appraisal, to start the IRS's review clock.
- Charitable gifts of business interests over $5,000 generally require a qualified appraisal by a qualified appraiser.
- Credentials such as ASA, ABV, and CVA, plus relevant industry experience, are worth checking.
- A CPA or attorney can help identify a qualified appraiser for the purpose at hand.
Key takeaways
- Appraisers blend income, market, and asset approaches based on the business and the purpose of the valuation.
- Assumptions such as growth, discount rate, and chosen comparables drive the result.
- Minority and marketability discounts are common in family transfers and draw IRS scrutiny.
- Tax filings and 409A grants have specific appraisal standards worth meeting from the start.
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