Is There a Preferred Approach to Valuing a Company For Sale?
Darren Mize, ASA, September 15, 2020
Let's review the 3 approaches to value:
- Cost Approach
- Market Approach
- Income Approach
The Cost Approach
The Cost approach relies on the business's balance sheet. So, unless the company is heavily invested in assets this approach is rarely used.
The Market Approach
The Market approach relies on comparable business transactions within the same industry. The key to using this approach is the reliability of good data. (see PeerComps).
The Income Approach
The Income approach is derived from 2 key variables: Cash Flow and Risk.
So, do I just pick one of the above?
It's simply not that simple. Every business is different and comes with its own unique set of characteristics, which have to be considered.
At GCF, our analysts use a combination of the Market and Income Approach's in most of our valuation engagements with with varying weights on each method. If you are working on a business and curious on how to best approach value on a business you are working on, give us a call.