United States. IRS Business Valuation Guidelines, IRM 4.48.4
How do you value a business, and which approach applies to yours?
Most articles give a multiple, an output, and skip which of the three approaches to value applies. The IRS tells its valuation personnel to consider all three. A loss-making, asset-heavy business and a profitable software firm are not valued alike.
Three
approaches the IRS Business Valuation Guidelines tell its own personnel to consider: the asset-based approach, the market approach and the income approach
Every asset
the sale of a business usually is not a sale of one asset: each asset is treated as being sold separately for determining gain or loss
Residual method
both the buyer and the seller of a business must use it to allocate the consideration across the assets transferred
Question 1
Why are you valuing it?
Purpose comes first because it fixes the standard of value, and the standard fixes the method. A valuation prepared for one purpose is often unusable for another.
Email me this result
We will send you these figures and a link back to them. One email, nothing else unless you tick the box.
What it does and does not check
The 6 things it checks
- The asset-based, market and income approaches, and when each is the right one
- Owner's discretionary earnings against EBITDA, and which businesses each belongs to
- Valuations for a sale, for tax and estate purposes, for a dispute, and for raising money
- What the financial records have to look like before any approach works
- Based on the IRS Business Valuation Guidelines at IRM 4.48.4 and IRS guidance on the sale of a business, read on 15 August 2026
- It tells you which approach applies. It does not produce a number, because a number needs your accounts and comparables
Business Value Now is an information site. It is not affiliated with, endorsed by or connected to the Internal Revenue Service, the Small Business Administration or any government body, and it is not an appraisal firm, a broker-dealer or a tax adviser. Nothing here is a valuation, an appraisal, or advice on a transaction or a filing. We publish no multiple, no discount rate and no valuation range anywhere on this site, because no public source sets one for a particular business and a figure without comparable transactions behind it launders a guess into a number. Everything stated as a requirement is taken from IRS guidance cited on this page and read on the date shown. We take no commission from any valuation firm or broker and carry no paid placements.
The three approaches to business value, what each needs and where each fails, 2026
Last updated
The IRS Business Valuation Guidelines direct that consideration should be given to the asset-based approach, the market approach and the income approach. They answer different questions, need different evidence and break in different places. This is that comparison in one table.
| Approach and method | What it measures | What it needs | Strongest when | Fails when |
|---|---|---|---|---|
| Asset-based: adjusted net asset value | What the assets would fetch, less every liability, including those not on the balance sheet | An asset schedule restated at current values, and a full liability list including accrued leave, deferred revenue and lease obligations | The business is loss-making, asset-heavy, or being wound down rather than sold as a going concern | Value sits in customer relationships, recurring contracts or people, none of which appear on a balance sheet |
| Market: guideline completed transactions | What buyers actually paid for comparable businesses | A comparable set matched on industry, size and deal structure, and an earnings figure computed the same way the comparable set computed theirs | The business is profitable and there is a real market of similar completed deals to draw on | The comparable set is not comparable, or the earnings definition differs between your figure and theirs |
| Market: guideline public companies | What public markets pay for earnings in the same sector | Listed companies in the same business, and adjustments for size, liquidity and control | The subject is large enough that public comparables are genuinely informative | Applied to a small private company without adjustment, where the size and liquidity gaps swamp the sector signal |
| Income: capitalisation of earnings | A single sustainable earnings figure converted to value at one rate | Earnings stable enough that one number represents the future, and a defensible capitalisation rate | Mature businesses with steady, predictable results and no step change ahead | Growth, decline or a recent structural change makes any single sustainable figure a fiction |
| Income: discounted cash flow | Projected cash flows brought back to today at a risk-adjusted rate | A projection somebody will stand behind, a discount rate, a terminal value, and a sensitivity table showing what moves the answer | Value is mostly ahead of the business: growth, a pipeline, or a contracted revenue base | The projection has never been tested against an outturn, or small changes to the discount and terminal growth rates move the answer by more than the answer is worth |
| Rules of thumb: industry multiples of revenue | Nothing about this business in particular | A single number and no evidence | Never, as a valuation. Occasionally useful as a sanity check on an answer reached another way | Used as the answer. It ignores margin, so two businesses with identical revenue and opposite profitability get the same value |
| All three, considered together | Whether the approaches agree, and what it means when they do not | Each approach run properly, then reconciled with the reasoning written down | Any valuation that will be read by somebody who did not commission it: an examiner, a buyer's adviser, a court | One approach is run and the other two are named in a paragraph to look thorough |
| Tax treatment of the eventual sale | How the agreed price is split across the assets, which decides the tax on both sides | The residual method, applied by buyer and seller, allocating consideration in the prescribed order | Always: the sale of a business usually is not a sale of one asset, and each asset is treated as being sold separately | Price is agreed without the allocation being negotiated, and the parties discover their interests were opposed all along |
- The IRS Business Valuation Guidelines identify three approaches to value, the asset-based approach, the market approach and the income approach, and state that consideration should be given to all three.
- The IRS guidelines require a valuation report detailed enough for a reader to reach a clear understanding of the analyses and to see how the conclusions were reached, with a signed certification.
- The sale of a business usually is not the sale of one asset: each asset is treated as being sold separately for determining the treatment of gain or loss.
- Both the buyer and the seller of a business must use the residual method to allocate the consideration to each business asset transferred.
- Seller's discretionary earnings and EBITDA are different measures, and which applies turns on whether the buyer will take the owner's job or pay somebody to do it.
- A revenue multiple ignores margin, so two businesses with identical revenue and opposite profitability receive the same value from it.
- A valuation prepared for a sale is generally not reusable for a tax, estate or litigation purpose, because the standard of value and the reporting requirements differ.
How this was compiled, and how to cite it
The three approaches and the instruction to consider all of them are taken verbatim from the IRS Business Valuation Guidelines at IRM 4.48.4, read on 15 August 2026, which is the manual the IRS applies to its own valuation personnel. The tax treatment rows are taken from IRS guidance on the sale of a business, which states that the sale usually is not a sale of one asset, that each asset is treated as being sold separately for determining the treatment of gain or loss, and that both the buyer and the seller must use the residual method to allocate the consideration. The methods listed under each approach are the standard families within it; the strengths and failure modes are stated as the conditions under which each method's inputs stop being reliable, not as opinions about which is best. No multiple, discount rate or valuation figure appears anywhere in this table. That is deliberate: no public source sets a multiple for a particular business, and a range published without the comparable transactions behind it is a guess given the appearance of a rate. What the table does instead is tell you what evidence each approach requires, so that a valuation you commission can be checked against it.
Cite this page
“The three approaches to business value, what each needs and where each fails, 2026”, Business Value Now, https://businessvaluenow.com/ (updated 2026-08-15). The three approaches and the instruction to consider all of them are taken verbatim from the IRS Business Valuation Guidelines at IRM 4.48.4, read on 15 August 2026, which is the manual the IRS applies to its own valuation personnel. The tax treatment rows are taken from IRS guidance on the sale of a business, which states that the sale usually is not a sale of one asset, that each asset is treated as being sold separately for determining the treatment of gain or loss, and that both the buyer and the seller must use the residual method to allocate the consideration. The methods listed under each approach are the standard families within it; the strengths and failure modes are stated as the conditions under which each method's inputs stop being reliable, not as opinions about which is best. No multiple, discount rate or valuation figure appears anywhere in this table. That is deliberate: no public source sets a multiple for a particular business, and a range published without the comparable transactions behind it is a guess given the appearance of a rate. What the table does instead is tell you what evidence each approach requires, so that a valuation you commission can be checked against it.
Want the number, not just the method?
Tell us roughly what the business is and why you are valuing it. Valuation firms and business brokers who work at that size will contact you directly.
Straight answers
How do you value a business?
By choosing an approach first and a number second. The IRS Business Valuation Guidelines at IRM 4.48.4 name three, asset-based, market and income, and say to consider all three. Asset-based leads for loss-making or asset-heavy firms, market for profitable ones with comparable transactions, income where value is future cash flow. A multiple is a market-approach output.
What is the difference between SDE and EBITDA?
Seller's discretionary earnings adds the owner's salary and benefits back to profit, with interest, tax, depreciation and amortisation: a buyer taking the owner's job pays nobody that salary. EBITDA keeps market pay for every role, the owner's included, as a cost. The buyer's plan decides, not size. An EBITDA multiple on SDE substantially overstates value: the commonest small business error.
Why do you not publish business valuation multiples?
No public source sets a multiple for a particular business, and a range without its comparable transactions is a guess dressed as a rate. What is publishable is what moves a multiple: earnings that continue without the owner, contracted recurring revenue, customer diversity, records that survive scrutiny, and lease security.
Can I use the same valuation for a sale and for a tax return?
Generally not. The standard of value and reporting requirements differ: a tax or estate valuation must be defensible to an examiner, not persuasive to a buyer. The IRS Business Valuation Guidelines require a report clear enough to follow the analyses and conclusions, with a signed certification. A short sale-side estimate falls short and invites examination.
How is the price split between the assets when a business sells?
By the residual method, and both sides must use it. IRS guidance says a business sale is usually not a sale of one asset. Each asset is treated as sold separately for gain or loss, and both sides allocate the consideration by the residual method. Their interests differ, so negotiate it at heads of terms, not signing.
What is my business worth if it is losing money?
Usually the assets, less every liability: the asset-based approach. With no earnings for an income or market approach, goodwill, which earnings above the return on assets buy, is generally absent. The number is often far below a revenue-based expectation. If the business is fixable, fixing earnings before selling usually pays better than arguing the asset schedule.
How much do the financial records affect the valuation?
More than most owners expect: they affect reliability, not the headline figure. Mixed personal spending creates uncertainty a buyer cannot size. Separate and evidence personal items, normalise owner pay to market, reconcile management accounts to tax returns, and put three years on one basis. Twelve months before a sale is realistic, and it shortens diligence too.
Sources
This site's own datasets, every figure quoted from its source and dated:
- The median published figure in the Earnings Normalisation Benchmarks is 126,520 USD across 5 sources' own pages (range 80,000 to 175,000 USD), read 15 October 2026.
- The Valuation Standards and Triggers carries 3 published figures read from 2 sources' own pages, from 250,000 to 350,000 USD, read 3 November 2026.
Settle the approach before you argue about the number
Purpose, earnings, who runs it and the state of the books. Four answers and the approach is decided.
Use this on your own site
<script src="https://businessvaluenow.com/embed.js" async></script>