Business Valuation Models: A Practical Overview

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A business valuation model represents the framework of assumptions and valuation methodologies selected to determine the value of a business. Every valuation engagement requires professional judgment, and no two valuations are identical. The model chosen must reflect the specific facts, purpose, and economic reality of the business being analyzed.

A well-designed valuation model is built on two fundamental components:

• Key assumptions about the business and its operating environment

• Appropriate valuation methods selected based on the company’s characteristics

 

Core Valuation Assumptions

At the foundation of every valuation are two critical decisions:

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1. Standard of Value

The standard of value defines whose perspective the valuation reflects. Common standards include:

• Fair Market Value (frequently used for tax, estate, and litigation matters)

• Investment Value (often used for strategic buyers or internal planning)

A valuation prepared for tax authorities may differ materially from one prepared for strategic investors, even when analyzing the same business.

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2. Premise of Value

The premise of value reflects the assumed condition of the business, such as:

• Going concern (the business continues operating)

• Liquidation (orderly or forced)

These assumptions have a significant impact on valuation outcomes. A going-concern valuation will typically produce a very different result than a liquidation-based analysis.

Assumptions drive results. Selecting the wrong premise or standard can lead to misleading conclusions.

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3. Selecting the Right Valuation Method

There is no single method that applies to all businesses. The choice of valuation method depends on factors such as company maturity, profitability, asset intensity, and market data availability.

Income-Based Methods

Income-based approaches focus on future economic benefits and are commonly used for operating businesses.

• Discounted Cash Flow (DCF). Particularly useful for early-stage companies or businesses with limited historical performance, as it emphasizes future cash flow projections and risk assessment. However, results are highly sensitive to assumptions.

• Capitalization of Earnings. Often appropriate for stable, mature businesses with predictable earnings and meaningful goodwill.

Market-Based Methods

Market approaches estimate value by reference to actual market pricing of similar businesses.

Common methods include:

• Guideline Company Transaction Method (sales of comparable private companies)

• Guideline Public Company Method (publicly traded comparables)

• Sales of Interests in the Subject Company

These methods are most effective when reliable and relevant market data is available.

Asset-Based (Cost) Methods

The Cost Approach values a business based on the fair value of its assets minus liabilities, restated from the balance sheet.

This approach is most applicable to:

• Asset-intensive businesses

• Holding companies and real estate entities

• Early-stage companies with limited operating history

• Businesses with minimal or no goodwill

A simple diagnostic often used is:

Revenue ÷ Total Assets

If the ratio is below 1.0, the business may be asset-intensive.

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​Key Takeaway

A business valuation is not a mechanical exercise. It is a forward-looking economic analysis that depends on sound assumptions, appropriate methodology, and informed professional judgment. Selecting the right valuation model is essential to producing results that are credible, defensible, and decision-useful.

👉 Contact us today at (787) 461-4995 to discuss how we can help you make confident, well-informed business decisions.

En Aria Consulting valoramos tu negocio.

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Yamil Rivera, CPA/ABV. Last updated on January 2, 2026.