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Income approaches examine future returns
An income approach relates value to the benefits expected from the business. A capitalisation approach can use a maintainable earnings measure and an appropriate rate. A discounted cash flow approach examines forecast cash over time and its present value.
Read our DCF guide for the forecast questions. Both approaches depend on assumptions about performance, investment and risk, even when the calculation itself looks straightforward.
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Market approaches need real comparability
Market evidence can help test what buyers pay for comparable businesses or interests. Check the size, margins, growth, concentration and transaction terms behind a comparison. An unexplained industry number is not enough to show that two businesses are comparable.
Our multiples guide explains the importance of matching the financial measure. The revenue comparison shows why equal sales do not establish equal value.
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Asset approaches examine what is held
An asset approach considers assets and liabilities on an appropriate basis. It can be relevant where the asset position is central to the decision, but recorded book amounts may differ from the values needed for the assessment.
Ask how identifiable intangible assets, liabilities and the business's ability to generate returns are considered. The method needs to match the subject being valued rather than simply total the easiest figures to find.
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Understand why conclusions differ
Two approaches may reflect different assumptions or different aspects of the business. Investigate the reason for the difference rather than averaging the results automatically. One may be a useful cross-check without carrying equal weight in the conclusion.
An independent valuation should explain the approach, evidence and purpose. Ask which information would most change the result and what uncertainty remains.
Use this in your business
A method-selection discussion
| Approach | Evidence to examine | Main question |
|---|---|---|
| Capitalised earnings | Maintainable earnings and selected rate. | Can this earnings basis be sustained? |
| Discounted cash flow | Forecast cash, investment and discount assumptions. | How credible is the future cash profile? |
| Market comparison | Comparable transactions or businesses and terms. | Are the comparisons genuinely relevant? |
| Asset-based | Assets, liabilities and valuation bases. | Does the asset position explain the value? |
A practical example
A growing business with uneven investment
An illustrative business may expect growth but need significant equipment investment before cash increases. A single recent earnings figure may not describe that pattern well. A forecast-based discussion can make the investment visible, while market and asset information provide useful checks on the assumptions.
Your next move
Discuss the approach behind your valuation
Bring the decision and the information available about the business. We can help you understand which valuation questions deserve the closest attention.
Discuss the approach behind your valuation