Understanding the Three Main Approaches to Business Valuation
When you hire a professional valuer, one of the first things they’ll do is decide which valuation approach best fits your company’s structure, financial data, and industry conditions.
Each approach looks at your business from a different angle, and understanding them helps you interpret your valuation results more confidently.
1. Asset-Based Approach
This method looks at what the company owns minus what it owes essentially its net asset value.
It’s most relevant for asset-heavy businesses like manufacturing, construction, or real estate firms.However, it doesn’t always capture the full value of intangible assets such as brand, reputation, or customer relationships.
2. Income Approach
This approach focuses on your company’s ability to generate future cash flows.
Analysts project expected income and discount it to its present value, considering risk and time.
It’s ideal for profitable, established companies with consistent cash flow.
Common techniques:
Discounted Cash Flow (DCF) method
Capitalization of Earnings method
3. Market Approach
Here, the valuer compares your business with similar ones that have been sold recently.
It’s similar to how real estate agents compare home sales in the same neighborhood.
The challenge is finding accurate, comparable transaction data, but when available, it provides powerful market evidence.
Which Approach Is Right for You?
Most valuations use a combination of these three approaches for balance and accuracy.
The right mix depends on factors such as industry, growth stage, profitability, and available data.
Next Step
Understanding valuation methods is just the beginning.
To see how these approaches apply to your company, schedule a consultation through our Business Valuation page.
You can also explore our article on How to Prepare Financials for a Valuation for practical preparation tips.