How to Value a Business in the USA: A Definitive Guide for Owners and CPAs

The 3 Core Business Valuation Approaches

When valuing a business for tax purposes, M&A, or estate planning, valuation professionals generally recognize three primary approaches. Depending on the industry, growth stage, and asset profile, appraisers will often use a blended model.

1. The Income Approach

The income approach determines value by converting anticipated economic performance into a present value. The most frequent methodologies here include:

• Discounted Cash Flow (DCF): This method estimates the present value of the firm based on forecasted future cash flows and an applied discount rate.
• Capitalization of Earnings: Better for businesses with highly stable and predictable historical earnings.

For Main Street and Lower Middle Market: Buyers heavily look at Seller's Discretionary Earnings (SDE) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

2. The Market Approach

Emphasized for its reliance on real-world data, the market approach derives fair market value by examining transactions of similar companies.

• Guideline Public Company Method: Looks at the stock prices of publicly traded companies that share characteristics with the subject business.
• Precedent Transactions (M&A): Examines historical transaction data from the sales of privately held companies in the exact same industry.

3. The Asset-Based Approach

This approach zeroes in on the balance sheet. It is most appropriate for holding companies, liquidations, or capital-asset-heavy industries where the underlying assets may be worth more than the operations themselves.

The Gold Standard: IRS Revenue Ruling 59-60

You cannot discuss US business valuation without referencing IRS Revenue Ruling 59-60. Issued in 1959, it remains the foundational framework for valuing closely held business interests for estate and gift tax purposes, and its principles are applied in nearly every contested valuation today.

The ruling states that business valuation is an inexact science and mandates that appraisers address eight specific factors:

Valuation Discounts: Understanding DLOM & DLOC

When valuing a minority interest in a privately held company, the value is rarely a simple pro-rata share of the total enterprise value. CPAs and appraisers must apply specific discounts to reflect the economic reality of the ownership interest.

Discount for Lack of Control (DLOC)

A minority shareholder in a private company cannot unilaterally declare dividends, hire management, or force a sale. Because they lack these control rights, their shares are worth less than a controlling owner's shares.

• The Math: If buyers typically pay a 30% premium for control in public acquisitions, the inverse implies a DLOC. In practice, DLOCs typically range from 15% to 35% depending on the specific governance structure.

Discount for Lack of Marketability (DLOM)

Unlike publicly traded stocks that can be liquidated in seconds, selling shares in a private company can take months or years—if a buyer can be found at all. The DLOM compensates the buyer for this illiquidity.

• The Math: Based on restricted stock studies and pre-IPO transaction data, DLOMs frequently range between 20% and 45%.

Mini Case Study: Valuing "ABC Manufacturing"

To see how these methodologies and discounts interact, let's look at a hypothetical scenario.

The Scenario: A founding partner of ABC Manufacturing (a privately held company) is retiring and selling their 20% minority stake to the remaining partners.

Best Practices for Preparing a Valuation

If you are a business owner preparing for a sale—or a CPA assisting in the due diligence—clean data is your best asset.

A well-executed valuation does more than put a price tag on a business—it highlights operational weaknesses, focuses strategic growth, and ensures that when it is time to transition, you are equipped with defensible, bulletproof numbers.