Income: future economic benefit

An income approach relates value to expected economic benefits. Discounted cash flow analysis brings forecast cash flows to a valuation date using a rate consistent with their risk. The forecasts, terminal assumptions and discount rate should work together as a coherent model.

Market: evidence from comparable businesses

A market approach considers pricing evidence from comparable companies or transactions. Comparability requires judgement about scale, growth, profitability, risk and the date of the evidence. A multiple is meaningful only when the financial measure and value being compared are consistent.

Assets: the underlying economic resources

An asset approach considers assets and liabilities on a basis appropriate to the engagement. It may be relevant for asset-holding entities or other circumstances in which the underlying resources are central. Book values are not automatically current values. Where multiple approaches are used, their reconciliation needs a reasoned explanation.

Choose the approach around the subject

For an operating business with a supportable forecast, an income approach can make the connection between the business plan and value explicit. Where suitable pricing evidence exists, the market approach provides another perspective. For a company whose value is closely tied to the assets it holds, an assessment of those assets and liabilities may be particularly informative.

These are starting points for judgement, not automatic rules. The purpose of the engagement, the nature of the business and the reliability of the available information determine which methods deserve weight.

Explain differences before reaching a conclusion

Different approaches can produce different indications of value. Before reconciling them, check that they address the same date, ownership interest and basis. An estimate for the whole enterprise should not be compared directly with an equity value without considering financing and other relevant adjustments.

A simple average can hide the reasons for a difference. The conclusion should explain which evidence is more persuasive and why. Where a method has limited support, its limitations should be clear rather than concealed by precise-looking calculations.