There's no single "correct" valuation method
The right valuation approach depends heavily on why you're valuing the business in the first place — a fundraising valuation, an ESOP valuation, and a regulatory valuation can legitimately use different methods and arrive at different (equally defensible) numbers.
Discounted Cash Flow (DCF)
DCF values a business based on its projected future cash flows, discounted back to present value. It's the most theoretically grounded method and works best for businesses with a reasonably predictable, forecastable cash flow profile. Its biggest weakness is sensitivity to assumptions — small changes in growth rate or discount rate can swing the valuation significantly, so the quality of the underlying projections matters enormously.
Comparable Companies (market multiples)
This method values a business by applying valuation multiples (like revenue or EBITDA multiples) observed in comparable public companies or recent transactions to the subject company's own financials. It's fast and grounded in real market data, but finding genuinely comparable companies — especially for a niche or early-stage business — can be difficult, and multiples can be volatile depending on market conditions at the time.
Asset-Based Valuation
This approach values a business based on the net value of its underlying assets minus liabilities. It tends to undervalue businesses whose worth comes primarily from future earnings potential, brand, or intangibles rather than physical assets — but it's often the most appropriate (or required) method for asset-heavy businesses, holding companies, or in liquidation/wind-down scenarios.
How the method is usually chosen
- Fundraising / M&A: Often DCF and comparable companies together, cross-checked against each other
- ESOP grant pricing: Method depends on the applicable valuation standard and stage of the company
- Regulatory purposes (FEMA, tax): The prescribed method depends on the specific regulation the valuation is being done for
- Distressed / asset-heavy businesses: Asset-based approaches often carry more weight
A credible valuation report usually triangulates across more than one method and explains why the final view was reached — a single-method valuation without that cross-check tends to invite more questions, not fewer.
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