Business · 5 min read · Updated November 10, 2026

Business valuation basics: what your company is really worth

Illustrative examples, education not advice.

In plain words

Many owners have a number in their head for what the business is worth. Often it is based on a friend’s sale, a rule of thumb or what they need to retire. The real value is what a willing buyer would pay a willing seller, both knowing the facts and neither being forced to act. That is the standard the IRS uses for gift and estate tax, set out in long-standing guidance.

Valuation matters well before you sell. It sets:

the price in your buy-sell agreement;
the coverage needed for key person and buy-sell insurance;
the value of shares you gift or leave to family;
how fair your estate equalization plan is between heirs;
what a lender might lend against the business.

How it helps real people

Sets a fair price that partners and families agreed on before any crisis.
Sizes insurance correctly, so a buyout is fully funded rather than half-funded.
Shows where value leaks, so owners can fix weak spots years before a sale.
Supports tax filings for gifts and estates with a defensible number.
Grounds retirement plans in what the business can realistically bring.

The three main approaches

Approach	How it works	Best for
Income	Estimates future cash flow and converts it to a present value, either by capitalising one year’s earnings or discounting several years’ projected cash flows	Profitable, ongoing businesses; the most common approach
Market	Compares to sales of similar businesses, often as a multiple of earnings or revenue	Industries with plenty of comparable sales
Asset	Adds up the fair value of assets minus liabilities	Holding companies, real estate firms, or businesses being wound down

Most professional valuations look at more than one approach and explain why they weight one more heavily.

The key earnings measure: normalising

Small business books rarely show “true” earnings. Valuers adjust for:

the owner’s pay, raised or lowered to a market salary for the role;
one-time costs, such as a lawsuit or a move;
personal expenses run through the business;
related-party rent above or below market.

The result is often called adjusted earnings or seller’s discretionary earnings for very small firms, or adjusted EBITDA for larger ones. A multiple is then applied.

What moves the value

Increases value:

recurring revenue and long-term contracts;
many customers, none too large;
a strong management team that runs things without the owner;
clean, consistent financial records;
growth trends and a defensible niche.

Decreases value:

heavy dependence on the owner;
one customer making up a big share of revenue;
poor records;
outdated equipment or technology;
pending legal or tax issues.

Discounts may also apply when valuing a part-interest. A minority stake, or shares that are hard to sell, are often valued below their proportional share of the whole. These discounts are common in gifting and estate planning, and the IRS scrutinises them.

A worked example

Illustrative. Two fictional landscaping companies each show $500,000 in pre-tax profit.

	Company A	Company B
Owner’s pay in the books	$60,000 (market would be $120,000)	$120,000 (market rate)
Adjusted earnings	$440,000	$500,000
Customer mix	40% from one developer	300 residential and commercial clients
Management	Owner runs everything	General manager in place
Illustrative multiple	3x	5x
Illustrative value	About $1.3 million	About $2.5 million

Same headline profit, very different value. Company B’s owner is better placed for a sale, a family transfer or a well-funded buy-sell.

These figures are illustrative only and not a valuation.

Who it’s for

Owners with partners, to set and fund a buy-sell agreement.
Owners planning to sell or retire within 10 years.
Owners gifting shares to family or trusts.
Owners buying key person or buy-sell insurance.
Families equalizing an estate that includes a business.

Who it’s not for

There is no owner this does not apply to, but the depth needed varies. A formal appraisal costs more and is needed for tax filings, gifts, disputes and many sales. An informal estimate may be enough for early planning.

Risks and trade-offs

Cost. A formal valuation by a credentialed professional can cost thousands of dollars.
Values change. A valuation is a snapshot. Update it every year or two for buy-sell purposes.
Disputes. Owners, heirs and the IRS may disagree. A well-supported report helps.
Insurance can affect value. After the 2024 Connelly decision, life insurance proceeds owned by a company to buy back shares may count in the company’s value for estate tax. That can change how buy-sell plans are designed.
Formula clauses can go stale. A fixed price set years ago may be far from today’s value.

Common mistakes

Using a rule of thumb without adjusting for your business’s risks.
Never updating the buy-sell price.
Ignoring owner dependence, which is often the biggest drag on value.
Taking aggressive discounts without support, which can draw IRS challenges.
Insuring based on an old value, leaving the buyout underfunded.

FAQs

How often should I value my business?

For buy-sell and insurance purposes, many owners update yearly or every two years, and before any gift, sale or major change.

Who can do a valuation?

Look for a credentialed business appraiser. For gifts and estates, the IRS expects a qualified appraisal.

Is a multiple of revenue reliable?

It is a rough guide, often used in certain industries. Earnings-based methods are usually more reliable.

Does my valuation have to match my buy-sell price?

Not always, but large gaps can cause disputes and tax problems. Many agreements require a fresh appraisal or a formula updated regularly.

Does life insurance count toward the value of my business?

It can, particularly for company-owned policies after the 2024 Connelly decision. Talk with a licensed professional about the structure.

Your next step

Talk to a strategist about whether your buy-sell price and insurance still match what your business is worth today.

Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.