What Is Valuation?
Valuation is the process of determining the present economic worth of an asset, a business, or a security. It uses financial data, projections, and comparison methods to estimate what something is worth for purposes like a sale, investment, financing, or tax.
What valuation is and why it matters
Valuation turns financial information into a defensible estimate of worth — essential when buying or selling a business, raising capital, settling an estate, or resolving a dispute. Because there's no single "true" value, valuation relies on methods that approach worth from different angles: the income approach (discounting future cash flows), the market approach (comparing to similar businesses or transactions, often via multiples of EBITDA or revenue), and the asset approach (net value of assets). A credible valuation usually triangulates across methods. For accounting firms, valuation support is a high-value advisory service tied to transactions and planning.
A worked example
A business generates $500,000 in annual EBITDA. Comparable businesses in its industry sell for roughly 4× EBITDA. Using the market approach, its estimated enterprise value is $500,000 × 4 = $2,000,000. A buyer might cross-check this against an income-approach valuation — discounting the business's projected future cash flows to present value — and reconcile the two before agreeing on a price.
How firms handle it today
Firms perform valuations using multiple methods, grounding them in reconciled financials and defensible assumptions, and document the analysis to support transactions, financing, or tax positions.
Related terms
- EBITDA
- Book value
- Net income
- ROI
- Intangible asset
FAQ
What are the main valuation methods?
The income approach (discounted cash flow), the market approach (comparables and multiples), and the asset approach (net asset value).
What's the difference between valuation and book value?
Book value is the recorded accounting net worth; valuation estimates current economic worth, which often differs substantially.
Why is a business worth a multiple of EBITDA?
Multiples are a market shorthand — buyers pay for expected future earnings, and comparable transactions establish a typical multiple for an industry.