Defending the number

Valuation Methods

Valuation for a live transaction, framed on IVS 105: income, market and cost approaches, earnings metrics and add-back defensibility, private-company discounts and level of value, equity allocation, and the difference between a valuation and a bid ceiling.

Who this is for

You have to defend a number to a counterparty, a credit committee, or a neutral — not produce a range for a pitch.

Which valuation approach governs when a number has to be defended?

International Valuation Standard 105 recognizes income, market and cost approaches, and a defensible valuation states which one governed and why the others were corroborative. What the number measures matters as much as the method: level of value, private-company discounts, and the support behind each earnings add-back all move the result. A valuation is also not a bid ceiling, because a buyer's maximum price reflects financing capacity a valuation excludes.^1,2,3

Source International Valuation Standards Council, IVS 105 — Valuation Approaches and Methods · IVSC, International Valuation Standards, effective 31 January 2025 · IVSC, IVS 200 — Business and Business Interests

A valuation that cannot survive being questioned is a number, not a valuation. This hub is organized on the standard rather than on the folklore — IVS 105's approaches and methods, Revenue Ruling 59-60's factors, the AICPA's distinction between a valuation engagement and a calculation engagement — because in a transaction the question is never what the model says. It is which approach governs, what the adjustment is supported by, and what level of value was actually measured.

Straight answers

What are the three valuation approaches under IVS?

IVS 105 sets out three approaches — market, income and cost — and the methods that sit under each. The market approach splits into the comparable companies method and the comparable transactions method; the income approach covers discounted cash flow and capitalization methods; the cost approach covers replacement, reproduction and summation. The standard's own framing is that the approach is selected for the asset and the available evidence, not applied as a fixed set of three answers to be averaged.

Sources: T1-08 · T1-09 · T1-10

Is an LBO analysis a valuation method or a bid ceiling?

A leveraged buyout analysis is a bid ceiling, not a valuation. It works backwards from a financeable capital structure and a required return to the highest price the buyer can pay and still service the debt, which answers what this buyer can pay rather than what the business is worth. Confusing the two is how a financing constraint gets presented to a seller as a valuation opinion.

Sources: T1-08 · T4-02

What level of value am I measuring — control marketable or minority non-marketable?

Level of value is the question that decides which discounts and premiums are even applicable, and it has to be fixed before any adjustment is applied. A control marketable value and a minority non-marketable value are different measurements of the same business, and applying a marketability discount to a value that was never marketable in the first place double-counts. Revenue Ruling 59-60 acknowledges that interests in closely held companies may warrant discounts; it does not license stacking them without stating the level being measured.

Sources: T1-11 · T2-09

What is the difference between a valuation engagement and a calculation engagement?

The AICPA's valuation standard distinguishes a valuation engagement, in which the analyst applies the approaches they judge appropriate and expresses a conclusion of value, from a calculation engagement, in which the analyst and the client agree in advance on limited procedures and the result is a calculated value rather than a conclusion. The difference is what the deliverable may be used for, which is why the engagement type is the first thing to check on a report handed across a deal table.

Sources: T2-08

Is adjusted EBITDA a GAAP measure?

No. EBITDA is not defined under GAAP and adjusted EBITDA is further from it, which is why the definition that matters in a transaction is the one written into the credit agreement or the purchase agreement rather than the one in the model. In a deal, the substantive question is not whether an add-back is allowed but whether it is defensible: recurring or genuinely one-off, supported by documents, and surviving a quality-of-earnings review.

Sources: T3-25 · T3-26 · T3-30

What are the eight factors in Revenue Ruling 59-60?

Revenue Ruling 59-60 sets out eight factors for the fair market value of stock in a closely held corporation, and every private-company valuation argument is fought on them. They are the nature and history of the business; the economic outlook generally and for the industry; book value and financial condition; earning capacity; dividend-paying capacity; goodwill or other intangible value; sales of the stock and the size of the block being valued; and the market price of comparable publicly traded stocks. It is a weighing framework rather than a formula, and it is the ground on which private-company adjustments are argued.

Sources: T1-11

Cornerstone answers

Each block below opens a cornerstone page in one of this hub's pillars: the passage, the takeaways, and — where a figure is published — the row-by-row provenance and confidence tier behind it.

DCF, comps, and precedent transactions: when each governs

Valuation has three approaches rather than three methods: income, market, and cost. Discounted cash flow is one income method; trading comparables and precedent transactions are the two market methods. Which governs depends on the asset and the evidence available — forecastable cash flows favour income, a genuine peer set favours market, and asset-heavy or non-earning businesses favour cost. A leveraged-buyout analysis is none of the three: it produces a bid ceiling, not a value.

There are three approaches — income, market, cost — and the market approach contains two methods. 'DCF, comps and precedents' is a list, not a structure.
State the terminal-value share of your discounted cash flow before your counterparty computes it. It usually dominates the answer.
An exit-multiple terminal value imports a market answer into an income model. Defensible when the holding period is finite and real; question-begging otherwise.
A private middle-market company is not a small public company. Applying a public peer multiple without stating the adjustments overstates value.
Precedent transaction multiples carry their announcement date inside them. The date is part of the data point.
An ability-to-pay analysis produces a bid ceiling, not a value. Conflating the two is the most consequential error in the domain.
Declare the level of value — control or minority, marketable or not — before any discount. Stacking discounts without it is the standard abuse.
Enterprise value and equity value are different numbers. The bridge between them is where the cash, debt and working-capital peg conversations happen.

Which approach governs, and where each one is attacked
Approach and method	When it governs	Where it gets attacked	Confidence	Evidence
Income — discounted cash flow	Forecastable cash flows, changing margin or capex profile, long horizon	Terminal value dominates the answer; discount-rate precision is illusory for a private company; forecast optimism	Frame from the standard; failure modes are structural synthesis	PrimaryT1-08
Income — capitalization of earnings	Stable, mature, low-growth business	Assumes a stability that often is not there; extremely sensitive to the capitalization rate	Structural	SynthesisT1-08
Market — comparable companies	A genuine set of traded peers exists	Public peers are larger, diversified and liquid; a private target is not a small public company	Method named in the standard	PrimaryT1-08
Market — comparable transactions	Recent, disclosed, genuinely comparable deals exist	Disclosure is sparse in the middle market; multiples embed control premia and cycle conditions; stale comparables mislead	Method named in the standard	PrimaryT1-08
Market — discretionary-earnings multiples	Below roughly three million of enterprise value, where the market actually clears on this basis	Crude; absent from published valuation material, which is why the segment is mispriced in both directions	Structural	Synthesis
Cost — adjusted net asset value	Asset-heavy businesses, holding companies, real-estate-centric entities	Ignores going-concern and intangible value	Structural	SynthesisT1-08
Cost — liquidation value	Distress, and as the floor in any downside case	Orderly and forced liquidation are materially different numbers	Structural	SynthesisT1-08
Not a valuation — ability to pay	Setting the maximum a specific buyer can bid given available debt and a return hurdle	Treated as a value rather than a ceiling, in both directions	Structural	Synthesis

Which approach governs, and where each one is attacked Rows follow the three-approach structure of the international valuation standard, in the standard's own order, with the transaction-specific analyses separated out because they are not valuation methods. Selection column states the condition under which the method is appropriate; the failure column states the standard attack. No ranking is implied — the point is applicability, not superiority.

Method Methods are ordered by the international standard's own approach sequence, not by frequency of use or by preference. The 'when it governs' column states an applicability condition rather than a ranking, and every row records whether its attribute is stated in the cited standard or is structural synthesis from the node graph.

Sources (8)

T1-08 International Valuation Standards Council, IVS 105 — Valuation Approaches and Methods — The three-approach frame and the two named market methods — comparable companies and comparable transactions.
T1-09 IVSC, International Valuation Standards, effective 31 January 2025 — The current edition of the international valuation standards and its general and asset-specific structure.
T1-10 IVSC, IVS 200 — Business and Business Interests — Business-interest-specific valuation requirements.
T1-11 Internal Revenue Service, Revenue Ruling 59-60 — The eight factors for the fair market value of closely held stock, and the acknowledgment that private interests may warrant discounts.
T2-08 AICPA, AICPA Statement on Standards for Valuation Services (SSVS) No. 1 / VS Section 100 — The distinction between a valuation engagement and a calculation engagement for an accountant performing a valuation.
T2-09 AICPA, AICPA Accounting and Valuation Guide: Valuation of Privately-Held-Company Equity Securities Issued as Compensation — Equity-allocation methods and the sourcing of marketability discounts for multi-class capital structures encountered in diligence.
T4-02 GF Data (an ACG company), GF Data — M&A and leverage reports — Lower-middle-market multiple data as the only credible source at this deal size, cited with its vintage.
T4-05 Houlihan Lokey, Houlihan Lokey industry and market updates — Sector multiple updates from an advisory firm, used as dated directional market data.

What this hub covers — 52 entities

Income approach

DCF and its parts — WACC, cost of equity, terminal value, Gordon growth versus exit multiple, APV, capitalization of earnings — plus the standard that frames them.

The three valuation approaches under IVS 105 Discounted cash flow (DCF)DCF model template and calculator Reverse DCF WACC Cost of equity and CAPM Terminal value Gordon growth terminal value Exit-multiple terminal value Adjusted present value (APV)Capitalization of earnings Dividend discount model Forecast optimism and where a private-company DCF breaks

Private company adjustments

DLOM, control premium and DLOC, level of value, size premium, Rev. Rul. 59-60, and the SSVS standard a CPA is bound by.

Size premium Discount for lack of marketability (DLOM)DLOC and control premium Level of value — control/minority, marketable/non-marketable Revenue Ruling 59-60 and its eight factors AICPA SSVS No. 1 / VS Section 100 — valuation vs calculation engagementunverified Restricted-stock and pre-IPO studies behind a DLOM

Market approach

Trading comps and precedent transactions, and when each governs. The comparison-hub pattern is the one genuinely good structural idea in the competitive set.

Trading comps (Comparable Companies Method)Precedent transactions (Comparable Transactions Method)Valuation multiples EBITDA multiple SDE multiples and sub-$3M pricing reality Business valuation methods — how to choose Weighting and reconciling approaches into one conclusion Why public peers overstate a private target's multiple Where middle-market deal multiples actually come from

Earnings metrics

EBITDA, adjusted EBITDA, SDE, and normalized earnings — where most middle-market price disputes actually live.

SDE vs EBITDA EBITDA EBITDA formula EBITDA margin Adjusted EBITDAunverified EBIT vs EBITDA EBITDA vs cash flow and free cash flow Normalized earnings

Cost approach

Adjusted net asset value, replacement cost, liquidation value, and when the answer really is the balance sheet.

Adjusted net asset value Replacement cost Liquidation value

Bid analysis

Ability-to-pay and the gap between a valuation and a bid ceiling. This is the traffic play in a pillar where the head terms are fortified.

LBO / ability-to-pay analysis — a bid ceiling, not a valuation Valuation vs bid — what the number is for Sum-of-the-parts valuation

Enterprise value

Enterprise versus equity value and the bridge between them. Head-term territory; optimized to be quoted.

Enterprise value Equity value Enterprise value vs equity value Cash-free debt-free — and what it does to the price

Equity allocation

OPM backsolve, PWERM, current-value method, and 409A — carried as the multi-class cap-table problem a buyer meets in diligence.

409A valuation OPM / backsolve PWERM Current value method Post-money valuation

Where this hub stops

Valuation as it is used and contested inside a transaction: which approach governs, what the adjustment is supported by, what level of value was measured, and where a bid ceiling diverges from a valuation.

Venture-round pricing is VCBeast's manager seat. Kept here only as definitional support for allocating equity across a multi-class cap table encountered in diligence — no fundraising angle.