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Approaches to Value Appraisers commonly use several approaches to develop indications of value. The three most common approaches are the asset-based, income, and market approaches. Asset-Based Approach The asset-based approach calculates the value of the business by determining the economic worth of a company’s assets in excess of its liabilities. When using this approach, the individual assets and liabilities of the business are analyzed and valued either separately or collectively. This approach considers assets and liabilities that are included on the subject company’s financial statements and other assets and liabilities that are not presented on the subject company's financial statements. Income Approach The income approach is based on the premise that value can be determined by estimating the present value of expected returns. This approach considers the income generated by the investment and the corresponding risks associated with the investment. Several methods are widely used in applying the income approach. These methods are generally classified as either capitalization methods or discounting methods. These methods include, but are not limited to, capitalization of earnings, capitalization of cash flows, discounted future earnings, and discounted future cash flows. The values calculated using these methods will be consistent as long as the assumptions regarding income, risk, timing, growth, and other factors are the same. Market Approach The market approach examines transaction prices of business that could reasonably be considered as economic substitutes of the subject business. The transaction prices or transaction price ratios are adjusted for operational and financial differences between the comparable businesses and the subject business. The adjusted prices or ratios provide an indication of the subject’s value. The market approach may be applied by using information on publicly traded companies or acquisition information on privately held companies. Although only the market approach has the term "market" in its name, all three approaches are based on market derived information. Asset Analytics, Inc. | |
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