United States. IRS Business Valuation Guidelines, IRM 4.48.4
How do you value a business, and which approach applies to yours?
Almost every article on this question answers a different one. It gives you a multiple, which is an output, and skips the decision that produces it: which of the three approaches to value applies here at all. The IRS directs its own valuation personnel to consider all three, and the reason is that they answer different questions and fail in different places. A loss-making business with a warehouse full of equipment and a profitable software firm with no assets are not valued the same way, and no multiple bridges that gap. Four questions and you will know which approach fits, what it needs from you, and what would make it the wrong one.
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.
What it does and does not check
- 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 independent site operated by Ellul Solutions Ltd. 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.
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.
| 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.
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 identify three approaches, the asset-based approach, the market approach and the income approach, and state that consideration should be given to all three. Which one leads depends on the business and the purpose: asset-based for a loss-making or asset-heavy company, market for a profitable business with comparable completed transactions available, income where the value is mostly in future cash flows. A multiple is an output of the market approach, not a starting point.
What is the difference between SDE and EBITDA?
Seller's discretionary earnings adds the owner's salary and benefits back to profit alongside interest, tax, depreciation and amortisation, because a buyer who will take the owner's job will not pay that salary to anybody else. EBITDA leaves market compensation for every role, including the owner's, as a cost. The test for which applies is what the buyer will do rather than how large the business is. Applying an EBITDA-based multiple to an SDE figure overstates value substantially and is the most common error in small business valuations.
Why do you not publish business valuation multiples?
Because 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. A multiple summarises what buyers paid in a specific set of deals; detached from that set it carries almost no information about yours. What is publishable, and more useful, is what raises and lowers 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 the reporting requirements differ, and a tax or estate valuation has to be defensible to an examiner rather than persuasive to a buyer. The IRS Business Valuation Guidelines require a report detailed enough for a reader to reach a clear understanding of the analyses and see how the conclusions were reached, together with a signed certification. A short sale-side estimate does not meet that specification, and using one for a filing invites the examination it was not written to survive.
How is the price split between the assets when a business sells?
By the residual method, and both sides must use it. IRS guidance states that the sale of a business 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 of a business must use the residual method to allocate the consideration to each business asset transferred. Because buyer and seller do not have identical interests in that allocation, it belongs in the negotiation at heads of terms rather than at signing.
What is my business worth if it is losing money?
Usually what the assets are worth, less every liability, which is the asset-based approach. There are no earnings for an income or market approach to work on, so goodwill is generally absent from the answer, because goodwill is what earnings above the return on assets buys. The number is often far below the owner's expectation, because the expectation was built on revenue. Where the business is fixable, fixing the earnings before selling usually pays better than arguing about the asset schedule.
How much do the financial records affect the valuation?
More than most owners expect, because they affect reliability rather than the headline figure. A buyer prices uncertainty, and books with personal spending mixed into operating expenses create uncertainty they cannot size. The work that pays is separating and evidencing personal items, normalising owner compensation to a market rate, reconciling management accounts to the tax returns, and getting three years onto a consistent basis. Twelve months before a sale is a realistic target, and it shortens diligence as well as supporting the price.
Sources
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.
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