Business Valuation 101: A Guide for Owners, CFOs, and Advisors

Business Valuation TL;DR: Methods, Process, and Key Takeaways

• A business valuation estimates economic worth at a specific date using financial data, market evidence, and professional judgment, tailored to the purpose (sale, financing, tax, litigation, financial reporting, ESOP).
• Valuations are commonly needed for transactions, financing decisions, tax and estate matters, disputes and compliance, and financial reporting requirements under U.S. GAAP or IFRS.
• Most engagements follow a consistent process: scoping, information gathering and interviews, financial and operational analysis, applying income, market, and asset-based approaches, then reconciling results into a documented conclusion.
• Valuation conclusions are materially influenced by normalizing adjustments, discounts for lack of control and marketability, and risk and growth assumptions that drive income-based methods.
• Credible valuations typically require an independent professional with relevant credentials and experience, especially when trustees, boards, auditors, courts, or regulators will rely on the conclusion.
• Timelines are often 4 to 8 weeks for a typical middle-market company, with duration driven by data availability, complexity, and review requirements. 

Business Valuation 101: A Guide for Owners, CFOs, and Advisors

A business valuation determines your company’s economic worth at a specific point in time. It combines financial data, market evidence, and professional judgment using standardized methods and sometimes applies adjustments for control and marketability to deliver a defensible estimate tailored to your purpose (sale, financing, litigation, financial reporting ESOP, etc.). Accurate valuations help you make smarter strategic, legal, and financial decisions.

PCE Insight:

Business valuation is rarely “just a number”, It is a decision tool that influences deal terms, financing, tax outcomes, and even equity compensation. At PCE, business owners often come in expecting a single formula and leave understanding that valuation is a combination of data, professional judgment about risk, growth and adherence to professional standards. The most successful valuation engagements are those where you and your advisors collaborate early, so assumptions are aligned before anyone relies on the conclusion.

When Is a Business Valuation Necessary?

You typically need a valuation when ownership is changing, value must be documented for a third party, or your governance structure demands independent fairness or reasonableness testing.

Want to know why your company may need a business valuation? Check out PCE’ article on Why (and How) You Need to Assess Your Business’s Value.

Across companies of all sizes and stages, valuation needs commonly arise in the following situations:

• Transactions and financing: Merger and Acquisition (M&A), recapitalizations, management buyouts, ESOP transactions, and fairness or solvency opinions requested by boards, lenders, or trustees.
• Tax and estate matters: Gifting, estate planning, 409A, and other tax-driven appraisals where the IRS expects support for value.
• Disputes and compliance: Shareholder disputes, marital dissolution, dissenting shareholder actions, and financial reporting requirements (goodwill impairment, purchase price allocations).
• Financial reporting: Purchase price allocations, goodwill and long-lived asset impairment testing, stock-based compensation valuations, and other fair value measurements required under U.S. GAAP or IFRS.

ESOP trustees, boards, auditors and courts usually expect the valuation to be performed by a qualified, independent professional with training, credentials, and experience in business valuation.

What you should consider: Map your specific trigger (ESOP, sale, gift, dispute, audit) to the level of support and independence that stakeholders will require, then scope the engagement accordingly.

Who Is Qualified to Perform a Business Valuation?

In practice, valuations are often performed by financial professionals with valuation credentials (such as ABV), business appraisers (ASA, CVA), and specialists within investment banking or valuation advisory practices. These professionals are trained to apply accepted valuation approaches and to defend their work in front of auditors, regulators, courts, and transaction counterparties.

The right expert for you depends on why you need the valuation. For example, ESOP valuations, financial reporting valuations, and estate and gift tax valuations each require familiarity with specific regulatory guidance and industry standards, while M&A-focused work often emphasizes market evidence and deal dynamics. In all cases, independence, objectivity, and clear communication are as important as technical modeling.

What you should be mindful of: When you interview valuation providers, ask about relevant credentials, regulatory experience, and how often they testify or support negotiations in your type of situation.

How is Business Valuation Performed?

Typically, a valuation consists of a five-step process with clear milestones.

Step 1: Planning and engagement scoping – You and the valuation professional agree on purpose (transaction, ESOP, buy-sell, tax, litigation), standard of value, valuation date, and the specific interest or asset being valued. This is also when conflicts, independence, timing, and fee structure are addressed.

Step 2: Information gathering and interviews – You provide 3–5+ years of financials statements, tax returns, capitalization table and shareholder agreements, key contracts, and business plans. The appraiser conducts management interviews and often performs a site visit to understand your operations, customers, competitors, and risk profile beyond the numbers. Check out PCE’s article on Beyond the Bottom Line: 8 Key Drivers to Maximize Your Business Valuation to see a summary of what valuation professionals focus on when assessing value beyond financial performance.

Step 3: Financial and nonfinancial analysis – Your appraiser normalizes earnings (removing nonrecurring items and adjusting owner compensation), analyzes margins and cash flows, and evaluates industry and economic conditions. They assess working capital needs, capital expenditures, and any unique assets or liabilities that materially affect value.

Step 4: Selecting and applying valuation approaches – The expert selects from the income, market, and asset-based approaches based on your company’s facts, data quality, and the valuation purpose. They build valuation models to estimate value, often reconciling multiple indications. The following table lists the different valuation approaches and when they are most commonly used.

Step 5: Reconciliation, conclusion, and reporting – The appraiser weighs the indications from each method, reconciles them to a single conclusion of value (or range), and documents the work in a written report that explains assumptions, methods, and key judgment calls. You then review the draft, ask questions, and work through any factual corrections before the report is finalized.

Next: Ask potential providers to walk you through their step-by-step process and where you will have input or review opportunities.

How does an Appraiser’s Professional Judgement Affect Value?

Your Company’s valuation relies on the appraiser’s adjustments and assumptions. You should understand at least three major categories: normalizing adjustments, discounts, and risk/return assumptions.

1. Normalizing financial adjustments

Appraisers may need to adjust your historical and projected financials to reflect the economics of the business on a normalized, market-based basis. Common categories include:

• Removing nonrecurring items (one‑time gains/losses, unusual legal fees, disaster recoveries).
• Adjusting owner compensation and related-party expenses to market levels.
• Reclassifying non-operating assets and income (excess cash, investment portfolios, noncore real estate).

2. Discounts for lack of control and marketability

When valuing minority or illiquid interests, appraisers may apply:

• Discount for lack of control (DLOC): Reflects that a minority owner cannot unilaterally control dividends, compensation, or strategic decisions; derived from empirical control premium and minority discount data.
• Discount for lack of marketability (DLOM): Reflects the reduced value of interests that cannot be readily sold, based on restricted stock studies, pre‑IPO studies, and option-based models.

These discounts can materially reduce indicated values for minority, illiquid interests, and they must be supported by data and consistent with the facts of your specific interest.

3. Risk and growth assumptions

Key assumptions such as discount rates, capitalization rates, long‑term growth rates, and margin sustainability drive income-based values. Appraisers typically use market evidence (e.g., equity risk premiums, industry risk metrics) alongside company-specific assessments (customer concentration, leverage, management depth) to build these rates.

What you should consider next: Request a sensitivity analysis that shows how your value changes with different discount rates, growth rates, or discount levels, and use that to frame your negotiation range.

Anonymized PCE Example

A privately held company engaged PCE to support a sale to a potential buyer. On review, PCE found the company was paying above-market rent to a related landlord entity and carrying several family members on payroll at non-market levels, including one no longer active in the business.

PCE benchmarked market rent and compensation, then normalized the financials by reducing rent to market and right-sizing or removing family salaries. The resulting EBITDA increase directly lifted the indicated value under income and market approaches, allowing the sellers to support a higher purchase price in negotiations.

FAQ: Business Valuation Basics

1. Can I perform a valuation myself?

DIY tools exist, but without professional standards and expertise, results may lack credibility with buyers, auditors, or courts.

2. How long does a business valuation process usually take?

For a typical middle-market company, you should expect 4–8 weeks from kickoff to final report, depending on data availability, complexity, and your responsiveness. Timeframes can compress or expand based on the need for site visits, multiple scenarios, or regulatory review.

3. What information do you need to provide for a valuation?

You can plan on providing 3–5 years of financial statements and tax returns, customer and product data, capitalization table and shareholder agreements, key contracts, and budgets or forecasts. Additional items such as fixed asset listings, leases, and industry benchmarks often help refine assumptions and support the final conclusion.

4. If other companies in the industry are trading at a 4–5x EBITDA multiple, will it be the same for my company?

Not necessarily. Benchmark EBITDA multiples are only starting points, because your company’s size, growth, margins, customer concentration, cyclicality, leverage, and risk profile can justify higher or lower multiples than the “market.” A good valuation will adjust observed multiples for these factors and reconcile them with income-based methods so you are not over- or under-valuing your business based on rule of thumb benchmarks.

5. How often should you update your business valuation?

Companies refresh their valuation every 1–3 years or around major events such as acquisitions, large capital projects, or ownership changes. ESOPs and certain regulatory contexts may require annual valuations to meet fiduciary and reporting obligations.

6. How much do discounts of lack of control and lack of marketability affect value?

The application of a DLOC and/or a DLOM can reduce the indicated value of a minority or illiquid interest by meaningful percentages, often in double digits, depending on the facts and studies applied. Conversely, when valuing a controlling interest, a control premium may be appropriate to reflect the economic benefits of control, such as the ability to influence operations, capital structure, or strategic direction. Because small changes in these discounts/premium can significantly change the dollar outcome, you should scrutinize the rationale and evidence supporting them.

7. Does a business valuation require regulatory compliance?

Yes, when a valuation is prepared for regulatory, tax, ESOP, financial reporting, or litigation purposes, it must comply with applicable standards, regulations, and documentation requirements. However, valuations prepared solely for internal management, strategic, or succession planning purposes generally do not require regulatory compliance

8. What steps should you take before hiring a valuation expert?

Clarify your purpose, timing, and stakeholders; gather your financials and key documents; and prepare to discuss your strategy and risk profile openly. Then, interview potential valuation experts on credentials, relevant experience, independence, and how they will tailor methods and reports to your situation.

9. What should you look for when hiring a valuation expert?

You should look for deep experience with companies of your size and industry, appropriate credentials, familiarity with your specific use case (ESOP, tax, litigation, fairness), and a willingness to walk you through the process in plain language. Independence, clear documentation, and responsiveness to your questions are essential, especially when board members, trustees, regulators, or courts may later scrutinize the work.

What you should consider next: Prepare a short list of questions for potential providers, focusing on credentials, standards, relevant case experience, and how they will communicate findings to your leadership and stakeholders.

Bringing it Back to Your Situation

From a business appraiser’s perspective, your valuation only achieves its purpose when it is both technically sound and usable in the real world where banks, trustees, auditors, regulators, and counterparties will test it. Your best results come when you approach valuation as a collaborative process: you provide clear objectives, organized data, and candid insight into risks and opportunities; your appraiser brings methodology, market evidence, and an independent lens.

If you are considering an ESOP, ownership transition, or meaningful transaction in the next 12–24 months, you should start now by cleaning up your financials, building defensible forecasts, and aligning your leadership team on strategy and timing. A well-structured, compliant valuation does more than answer “what is my business worth?” It helps you make your next move with confidence.

Sadikshya (Sadi) Karki, ASA

Sadi Karki is an Associate in PCE’s valuation practice, specializing in valuations for estate and gift tax, shareholder disputes, ESOPs, and other business needs. With deep expertise in financial modeling and quality control, she delivers precise, insightful valuations that support confident decision-making.

Read Sadi' Full Bio