9 valuation methods US appraisers use under ASA and NACVA standards

What to take away

The three families of valuation methods

Every accepted approach in the United States sits in one of three families. Income methods convert expected economic benefits into a present value. Market methods price the subject against what similar businesses sold for or trade at. Asset methods rebuild value from the balance sheet.

Nine methods carry the work. Five are income: discounted cash flow, capitalized earnings, relief-from-royalty, excess earnings and with-and-without. Two are market: guideline public company multiples and guideline transactions. Two are asset: adjusted net asset and liquidation value.

The facts pick the family, not preference. A company with stable, contract-backed cash flow suits the income approach. A company in an active sector with many public peers suits the market approach.

A holding company whose value sits in real estate, equipment or securities often suits the asset approach. Appraisers often use two or three methods and weight the results.

A working valuation methods comparison starts with the definition of profit each method uses. Pre-tax earnings, after-tax cash flow and distributable earnings are not interchangeable. Mixing them produces a number that cannot be defended in court or to a lender.

Discounted cash flow: rate and terminal value

Discounted cash flow projects the cash the business can distribute to owners and discounts it at a rate that reflects risk. It is the most flexible income method and the easiest to misuse. Small changes in the discount rate or terminal growth rate move the answer sharply.

The projection period usually runs five years, sometimes ten for a project or a startup. Each year's cash flow starts from revenue, subtracts operating costs, adjusts for taxes on an unlevered basis, and adds back non-cash charges.

Capital expenditure and working capital changes come out. Cash tied up in the business is not available to owners.

The discount rate for a private US company is typically built with a modified capital asset pricing model. The appraiser starts with a risk-free rate, often the 20-year US Treasury yield, and adds an equity risk premium published in the Kroll Valuation Handbook.

A beta drawn from comparable public companies follows, then a size premium and a company-specific premium. That last piece captures customer concentration, key-person risk and thin management depth.

Private company discount rates typically land between 15 and 30 percent, and the spread widens as revenue falls.

Terminal value closes the model. The two accepted routes are a perpetuity growth formula and an exit multiple applied to the final year's metric. The growth rate cannot exceed long-run nominal growth of the economy, and the exit multiple must be traceable to market evidence. Both belong in the report with their sources.

Guideline public company multiples

Guideline public company multiples price a private business by reference to publicly traded peers. The appraiser selects companies in the same industry, of similar size and with comparable growth and margin profiles, then calculates multiples of enterprise value to revenue, EBITDA or earnings.

Comparables are found through SEC filings. The SEC filings search returns annual reports, proxy statements and registration statements, which give revenue, margins, debt and segment data. Appraisers classify candidates by industry using the SIC code list, which groups companies into standard industrial classification codes.

A peer set often holds five to ten companies. A set below five weakens the median, and the report should say why the set is small.

Once the peer set is fixed, the appraiser applies a discount for lack of marketability, because shares in a private company cannot be sold in minutes. Restricted stock studies and the Pluris DLOM Database are common sources, and typical discounts run from 10 to 30 percent.

A control premium or minority discount may also apply, depending on the interest being valued. Those adjustments are where most disputes begin.

Guideline transactions and precedent multiples

Guideline transactions, also called precedent transactions, use prices paid in actual acquisitions of similar companies. They capture control and synergies in a way that trading multiples do not, because the buyer bought the whole business.

Deal data comes from merger proxies, tender offer documents and transaction databases such as DealStats, S&P Capital IQ and PitchBook. The appraiser records the date, the target's size, the multiple paid and the consideration mix.

Deals older than roughly three years carry less weight. Deals struck in a credit boom may not reflect today's financing cost.

Control premiums are published in the Mergerstat/BVR Control Premium Study, where the median has typically run between 20 and 30 percent.

The gap between guideline public company multiples and guideline transactions is often wide. A strategic buyer may pay a premium for cost savings that a financial buyer cannot achieve. The report should say which type of buyer the subject most resembles before applying either set of multiples.

Capitalized earnings and the single-period method

Capitalized earnings takes one representative earnings figure and divides it by a capitalisation rate. It is a single-period income method, and it works when the business has reached a steady state with predictable results.

The representative earnings figure is the hard part. The appraiser normalises owner compensation, removes one-time items, adjusts rent to market and strips out personal expenses. This is where valuation methods mistakes usually enter, because a base figure that is too high or too low flows straight into the value.

The capitalization rate is the discount rate minus expected long-term growth. If the discount rate is 22 percent and growth is 3 percent, the capitalization rate is 19 percent. A company earning $1 million of normalized earnings would then be valued near $5.26 million. The report must show how both inputs were derived.

Adjusted net asset and liquidation approaches

Under the adjusted net asset method, the appraiser restates each balance sheet item to fair market value. Inventory is marked to saleable condition, receivables to collectible amounts, equipment to market value, and real estate to appraised value. Identified intangible assets may be added, and liabilities are restated as well.

The result is a value of the net assets. For an operating company, that figure is usually a floor rather than the answer, because it ignores the earnings the assembled assets produce. For a holding company or an asset-heavy manufacturer, it can be the primary method.

Liquidation value assumes the business stops trading and assets are sold piecemeal. Orderly liquidation allows a reasonable marketing period, often six to twelve months, and recovers more. Forced liquidation assumes a quick sale at lower prices. Lenders and bankruptcy courts use both, and UCC Article 9 governs how secured creditors claim against the proceeds.

Relief-from-royalty, excess earnings and with-and-without

Relief-from-royalty values a trademark, patent or software by estimating the royalty the owner avoids paying. The appraiser projects revenue attributable to the asset, applies a market royalty rate and discounts the stream to present value. Royalty rates come from license agreements filed with the SEC, court decisions, and databases such as RoyaltyStat and ktMINE.

Trademark royalty rates typically fall between 1 and 5 percent of revenue. Patent and software rates often sit higher, and the spread depends on exclusivity, remaining life and geography.

The method fits assets that are licensed in the ordinary course. It requires a defensible royalty rate, which is often the weakest link.

The excess earnings method isolates the cash flow attributable to an asset after returns to other assets. It is the usual route for customer relationships in a purchase price allocation under ASC 805. The with-and-without method compares cash flow with and without the asset, and it suits non-compete agreements and similar contract rights.

How ASA and NACVA standards govern each method

The American Society of Appraisers issues business valuation standards that require a defined standard of value, a stated valuation date, adequate data and a report a reader can follow. The appraiser must disclose the scope of work and any limiting conditions. ASA credentials include the Accredited Senior Appraiser designation and the Accredited Member level.

NACVA offers the Certified Valuation Analyst credential and its own practice standards, with an emphasis on documentation and on the support for adjustments. Both bodies expect the appraiser to explain why a method was selected and why others were excluded.

Federal rules add a layer. The IRS examines valuations in estate, gift and succession settings, and Revenue Ruling 59-60 lists the factors it weighs, including earning capacity, dividend-paying capacity, goodwill and prior sales of the stock. A qualified appraisal is required for charitable deductions above $5,000, reported on Form 8283.

GAAP, in ASC 820, defines fair value and the three-level hierarchy of inputs. ASC 805 governs purchase price allocation, and ASC 350 governs goodwill impairment. Stock option grants to employees usually need a Section 409A valuation, which follows the same framework.

FINRA oversees broker-dealers involved in M&A. The Hart-Scott-Rodino Antitrust Improvements Act can require pre-merger notification for larger deals. That threshold adjusts each year and sits above $100 million, which affects timing and cost.

A report that names its standard of value, its sources and its adjustments is far easier to defend than one that presents a single number with no trail.

Choosing between methods and reconciling the range

No single method is correct for every company. The appraiser selects the methods the facts support, applies each one, then weights the results into a concluded value. The weights are a matter of judgment and must be explained.

Industry data supports the assumptions. The BLS Handbook of Methods explains how the Bureau of Labor Statistics builds the benchmarks behind industry comparisons. The Quarterly Census of Employment and Wages supplies employment and wage data by industry and county, which helps test revenue per employee and payroll assumptions.

Legal definitions matter when the report is used in litigation or tax. The Wex legal dictionary defines terms such as fair market value and going concern, and those definitions shape the standard of value applied.

Requirements differ by method. The valuation methods requirements for a discounted cash flow model are not the same as those for a market approach, and a report that skips them invites challenge. A worked set of valuation methods examples shows how the same business produces different numbers under different approaches.

Reconciliation is not averaging. The appraiser states which method best reflects the subject's economics and why. A company with a long contract backlog and stable margins usually lands on the income approach. A company in a hot sector with many recent deals lands on the market approach. An asset-heavy holding company lands on the asset approach.

A worked reconciliation

Assume a Texas manufacturer with $8 million of revenue and $1.2 million of normalised EBITDA. The discounted cash flow model, built on a 20 percent discount rate and a 3 percent terminal growth rate, returns $7.4 million. Guideline public company multiples of 6.0 times EBITDA return $7.2 million.

Guideline transactions at 7.5 times EBITDA return $9.0 million. The adjusted net asset method returns $4.1 million.

The appraiser weights the income approach at 50 percent, the public company multiples at 30 percent and the transaction multiples at 20 percent. The asset method serves as a floor check. The concluded value lands near $7.6 million before any discount for lack of marketability.

Steps an appraiser follows

Checklist before commissioning a report

Method comparison at a glance

Common questions

What is firm valuation under US standards?

It is the process of estimating the economic value of a business or an ownership interest, using methods accepted by the American Society of Appraisers and NACVA and applied to a defined standard of value.

What are the nine valuation methods US appraisers use?

Discounted cash flow, capitalized earnings, relief-from-royalty, excess earnings and with-and-without sit in the income approach. Guideline public company multiples and guideline transactions sit in the market approach. Adjusted net asset and liquidation sit in the asset approach.

Which method do US appraisers use most?

The income approach, usually discounted cash flow or capitalized earnings, is the most common primary method for operating companies. Market and asset methods are used alongside it for support or as the primary approach in specific sectors.

Why do two appraisers reach different numbers?

They may select different methods, use different comparable sets, apply different discounts or normalize earnings differently. The report should let a reader trace each choice.

Do I need a valuation for an SBA loan?

SBA loan programs often require a business appraisal to support acquisition financing. The lender will want a report that follows accepted standards and supports the loan amount.