The short version
There is no single “correct” value for a business. There is a range of defensible values, and a price one buyer agrees to pay on one day.
Valuers use a handful of methods to build that range. They fall into three families:
- Market approach: what similar businesses are worth, judged by multiples of earnings or revenue.
- Income approach: what the future cash flows of this business are worth today.
- Asset approach: what the business owns, less what it owes.
The International Valuation Standards Council, which sets the International Valuation Standards, publishes standards whose general requirements cover “bases of value, valuation approaches and methods, and reporting” (IVSC). In our experience, professional valuers run several methods and study where the answers disagree.
For what drives your own number, read What is my business worth?.
Method 1: earnings multiples
A multiple is a shortcut: “how many times its annual earnings do businesses like this sell for?”
EV/EBITDA
EBITDA is earnings before interest, tax, depreciation and amortisation: a rough proxy for the cash a business generates from operations.
Enterprise value (EV) is the value of the whole business, as if it had no debt and no surplus cash. In our experience, EV/EBITDA is the most common multiple in private company M&A, because both sides of the ratio ignore how the business is financed, so a company funded with bank loans compares with one funded by its owner.
Used for: profitable, steady businesses in services, distribution, manufacturing and trading.
P/E (price to earnings)
P/E divides the value of the shares (equity value) by net profit after interest and tax. It is the multiple most quoted for listed shares.
Used for: banks, insurers and other businesses where debt is part of the product, and by buyers who think in net profit terms. In our experience, some trade buyers in Asia talk in P/E; a good adviser converts their number to an EV/EBITDA equivalent so offers compare like for like.
EV/revenue
EV/revenue compares enterprise value to sales. It ignores profit entirely, which is both its use and its danger.
Used for: young, fast-growing businesses with recurring revenue (software subscriptions, for example) where profits are small today but expected later. In our view, a revenue multiple on a mature, low-margin business usually signals someone wants a bigger number than the earnings support.
Where multiples come from
A multiple is only as good as the comparison behind it. There are two sources:
- Trading comparables (trading comps): what listed peers are worth on the stock market today, divided by their earnings. The data is public and current. Academic datasets such as Aswath Damodaran’s EV/EBITDA multiples by sector, published by NYU Stern, show how widely multiples vary across industries (Damodaran, NYU Stern).
- Comparable transactions (precedent transactions): what buyers actually paid for whole companies in past deals. These include a control premium (the extra a buyer pays to own and run the business outright), so they often sit above trading multiples for the same sector.
Both need adjusting. A listed company is usually larger, more diversified and easier to sell than a private SME. Private transaction data is patchy, and the terms behind a headline price (earn-outs, deferred payments) are often undisclosed.
We do not publish market multiple ranges on this page. A range without its source, date and peer set is a number waiting to mislead someone.
Method 2: discounted cash flow (DCF)
A discounted cash flow valuation asks a simple question: if I own this business, how much cash will it hand me in the future, and what is that cash worth today?
Money later is worth less than money now: today’s dollar could be invested, and a future dollar might never arrive. The discount rate expresses both. The riskier the cash flows, the higher the rate, and the less those future dollars are worth today.
A DCF forecasts cash flows for a few years, then estimates a terminal value: a single figure for all the years after the forecast. In our experience, the terminal value is usually the majority of the answer, which is why small changes in assumptions move the result so much.
Why DCF is so sensitive
Here is a simple illustrative terminal value, using the standard growing perpetuity formula: value = next year’s cash flow divided by (discount rate minus growth rate).
| Illustrative case | Next year’s cash flow | Discount rate | Growth rate | Calculation | Value |
|---|---|---|---|---|---|
| Base | S$1.0m | 12% | 3% | 1.0 ÷ (0.12 minus 0.03) = 1.0 ÷ 0.09 | S$11.1m |
| Slightly kinder | S$1.0m | 11% | 4% | 1.0 ÷ (0.11 minus 0.04) = 1.0 ÷ 0.07 | S$14.3m |
In this illustrative example, moving two assumptions by one percentage point each lifted the terminal value by about 29% (14.3 ÷ 11.1 = 1.29). Nothing about the business changed. Only the spreadsheet did.
That is the core weakness of DCF for small private companies: few have a reliable long-range forecast, and the founder who prepares it is not neutral. In our experience, DCF tends to overstate value for founder-led SMEs unless growth is already secured by signed contracts.
DCF is still useful: it forces everyone to state their assumptions out loud.
Method 3: net asset value (NAV)
Net asset value is everything the business owns (property, equipment, inventory, receivables, cash) minus everything it owes.
Book NAV is a reference point, not a guaranteed floor. The practical floor is what the assets would actually realise if sold, net of the costs of selling them and winding down (liquidation value), and that can be well below book value. A business that earns good returns is worth more than its assets, because the buyer is paying for the earnings those assets produce, the customers, the team and the know-how.
NAV matters most when the business is asset-heavy, when profits are too low for an earnings value to exceed the assets, or when the owner is weighing a sale against winding down.
Where a business holds property it does not need to operate, in our experience buyers often value the operating company on earnings and treat the property separately.
Method 4: LBO and affordability analysis
Private equity firms value businesses backwards. Instead of asking “what is it worth?”, they ask “what is the most I can pay and still earn my target return?”
A leveraged buyout (LBO) model works like this:
- Estimate earnings at a planned exit date and what the business could be sold for then.
- Work out how much debt it can carry, because borrowing reduces the equity the fund puts in.
- Work back from the fund’s required return to the maximum price today.
A simplified illustrative example, with every figure hypothetical:
| Step | Illustrative figure | Arithmetic |
|---|---|---|
| EBITDA at exit in five years | S$2.6m | Assumed growth from today’s S$2.0m |
| Exit value | S$15.6m | 2.6 × 6.0 (illustrative exit multiple) |
| Loan used at purchase, assumed fully repaid by exit | S$4.0m | Repaid from the business’s cash flow |
| Fund’s target: multiply its money by | 2.5 times | Hypothetical target, not a market figure |
| Maximum equity the fund can invest today | S$6.24m | 15.6 ÷ 2.5 |
| Maximum price it can pay today | S$10.24m | 6.24 equity + 4.0 loan |
The example ignores interest and fees, and it assumes the fund sells at 6.0 times EBITDA after buying at about 5.1 times (10.24 ÷ 2.0). If the exit multiple were no higher than the entry multiple, the maximum price would be lower.
If the seller wants more, the fund walks away, borrows more, or proposes a structure (an earn-out or founder reinvestment) to close the gap. See M&A deal structures explained and Trade buyer vs private equity.
For a seller, the LBO model is a reality check: it shows roughly where financial buyers will stop.
Rules of thumb, and why to distrust them
Every industry has a saying: “clinics sell for X times profit”, “agencies sell for one year’s revenue”. In our view, rules of thumb fail for predictable reasons:
- Nobody can tell you which deals they came from, when, or on what earnings basis.
- They ignore the bridge. “Five times profit” says nothing about who keeps the cash or pays off the loans.
- They average away quality. Contracted recurring revenue and a strong second line of management deserve a different multiple from a business where the founder holds every customer.
- They anchor founders. In our experience, a number heard at a dinner party can follow a founder into every negotiation.
From enterprise value to equity value: the bridge
In our experience, this is the step founders most underestimate. A headline offer is usually an enterprise value, quoted “cash-free, debt-free”. What you receive is the equity value, after the bridge.
The main items:
- Net debt. Bank loans, hire purchase and finance leases are deducted. Surplus cash is added back. Net debt is debt minus that cash.
- Debt-like items. Obligations that behave like debt even if they are not called debt: unpaid tax from past years, overdue supplier payments, deferred payments to previous owners, accrued but unpaid bonuses, and similar. Buyers will argue to deduct these; sellers will argue they are normal operating items. This list is negotiated.
- Working capital adjustment. A business needs a normal level of receivables and inventory, minus payables, to operate. The buyer and seller agree a “normal” level (often called the peg or target). If the business is handed over with less, the price falls by the shortfall. If it has more, the price usually rises.
Worked example: from EBITDA to equity value (illustrative)
All figures below are illustrative and do not describe any real business or market multiple.
| Line | Amount | Arithmetic |
|---|---|---|
| Normalised EBITDA | S$2.0m | After removing one-offs and owner costs |
| Multiple applied | 6.0 times | Illustrative only |
| Enterprise value | S$12.0m | 2.0 × 6.0 |
| Less net debt | (S$1.0m) | Bank loans S$2.5m minus surplus cash S$1.5m |
| Less debt-like items (unpaid prior-year tax and accrued bonuses) | (S$0.3m) | |
| Working capital at completion versus agreed normal level | (S$0.2m) | Actual S$1.8m versus target S$2.0m |
| Equity value to shareholders | S$10.5m | 12.0 minus 1.0 minus 0.3 minus 0.2 |
The headline “S$12 million deal” pays shareholders S$10.5 million before fees and tax, and before any part of the price is deferred or made conditional.
Comparing the methods
| Method | Best for | Main weakness |
|---|---|---|
| EV/EBITDA multiple | Profitable, steady private businesses | Only as good as the comparables and the EBITDA it is applied to |
| P/E multiple | Financial businesses; buyers who think in net profit | Distorted by how the business is financed and taxed |
| EV/revenue multiple | Fast-growing, recurring-revenue businesses with immature profits | Ignores profitability entirely |
| Trading comparables | Current, public, transparent evidence | Listed peers are usually larger and more liquid than a private SME |
| Comparable transactions | Evidence of what buyers actually paid for control | Private deal data is patchy; terms behind the headline often unknown |
| Discounted cash flow | Businesses with secured, forecastable growth; buyers underwriting cash flows | Highly sensitive to discount rate, growth and terminal value |
| Net asset value | Asset-heavy or loss-making businesses; a reference point for the downside | Book value is not a guaranteed floor; ignores earning power |
| LBO / affordability | Estimating what private equity can pay | Shows a buyer’s ceiling, not the business’s worth |
| Rules of thumb | Starting a conversation | Unsourced, undated, and blind to the bridge |
Why different buyers pay different prices
Two buyers using the same methods can still offer very different prices. In our view, three reasons explain most of the gap:
- Synergies. A trade buyer that can cut duplicate costs, sell more to your customers or fill its own factories can afford to share some of those gains with you. A financial buyer usually has fewer synergies to share.
- Risk. Each buyer prices its own view of what could go wrong: customer concentration, founder dependence, regulatory exposure. A buyer that already knows your industry may see less risk, and pay more for it. As Gwee Yi Chen puts it: “A buyer doesn’t pay for what you earned. They pay for what they can confirm will continue after you leave.”
- Financing. Cheaper money lets a buyer pay more for the same cash flows. A large corporate, a private equity fund using bank debt and an individual using savings face very different costs of capital.
This is why, in our view, the best price usually comes from a competitive process that puts several types of buyer in front of the business at once, rather than from refining a single valuation model.
Our approach
For founder-led private companies, our approach is:
- Comparables lead. The headline value is anchored to multiples of normalised earnings, drawn from trading and transaction comparables, because that is how most buyers of these businesses actually price.
- DCF is the upside case. We use it to show what a buyer would pay if it believes the growth story, not as the base number. If DCF and comparables diverge sharply, that gap is the conversation to have, not something to average away.
- NAV is a reference point, not a floor. We test what the assets would realise net of costs, which can be below book. It anchors asset-rich businesses but is rarely the headline.
- LBO analysis tells us where financial buyers stop, which shapes who we approach.
All of it rests on a clean bridge to normalised EBITDA. In our view, a defensible multiple on a defensible number beats a sophisticated model.
Key takeaways
- Most private businesses are valued as a multiple of normalised earnings, cross-checked against comparable deals, DCF and net assets.
- Enterprise value is the price of the business; equity value is what you receive after net debt, debt-like items and the working capital adjustment.
- DCF is powerful but highly sensitive: in our illustrative example, a one-point change in two assumptions moved the terminal value by about 29%.
- Book net asset value is a reference point, not a guaranteed floor; an LBO model shows where private equity buyers will stop.
- Distrust rules of thumb and unsourced multiple ranges; ask which deals, which date and which earnings basis.
- Different buyers pay different prices because of synergies, risk and financing, which is why competition usually matters more than the model.