Valuation Approach

Posted in Finance, Accounting and Economics Terms, Total Reads: 452
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Definition: Valuation Approach

Valuation Approach is a set of procedures by which the monetary value or the worth of a business is determined. It is used to determine the price which a person is willing to pay or receive if a business is sold.


There are three main valuation approaches,

1. The Asset Approach: The business is viewed as a set of assets and liabilities, in which all the relevant costs and investments are considered to determine the worth. This is used when there a high level of uncertainty of limited information about the business is available


2. The Market Approach: This approach considers transactions in the market place to estimate the worth of a business. The value is estimated based on the price of a comparable asset in a similar market transaction. For example, if you are trying to sell a business in the market, you will determine its worth by estimating the value at which similar businesses are being sold in the market.


3. The Income Approach: The worth of the business is estimated based on the expected future returns or economic benefits that can be obtained over the remaining life of the assets. While using this method, the risks of competition, market maturity, substitutes and other industry changes must be taken into account which may change the expected economic benefit.

 

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