Now that you've mastered the three valuation approaches, here's the million-dollar question: which method should you actually use?
The answer isn't one-size-fits-all. Smart valuators choose their approach based on the specific business, available data, and purpose of the valuation.
Engagement Message
Which valuation approach—Asset, Market, or Income—felt most intuitive to you?
Here's the key insight: the "best" approach depends entirely on context. A tech startup requires different methods than a 50-year-old manufacturing company.
Think of valuation methods like tools in a toolbox - each has its perfect use case.
Engagement Message
What factors do you think should influence which approach to choose?
Factor #1: Purpose of valuation. Selling to a competitor? Market comparables matter most. Tax dispute? Asset values become critical. Investment decision? Future cash flows take center stage.
Different stakeholders care about different aspects of value.
Engagement Message
Why might a tax authority prefer asset-based over income-based methods?
Factor #2: Business characteristics. Asset-heavy companies (real estate, manufacturing) suit asset approaches. Service companies with strong cash flows suit income approaches.
Companies with good public comparables suit market approaches.
Engagement Message
Which approach would work best for a profitable consulting firm?
Factor #3: Data availability. The income approach needs reliable financial projections. Market approach needs comparable companies. Asset approach needs current asset values.
No data means no reliable valuation using that method.
Engagement Message
What happens if you can't find any comparable companies in the market?
Here's a practical framework: Start by asking three questions:
- What's driving the valuation need?
- What type of business am I valuing?
- What reliable data do I have?
The answers point you toward the most appropriate method.
Engagement Message
Pick one question and name the factor it links to.
Professional valuators often use multiple approaches as a reality check. If asset approach says $5 million but market approach says $15 million, investigate the difference!
This triangulation builds confidence in your final valuation range.
Engagement Message
Why might different approaches give very different values for the same business?
Type
Multiple Choice
Practice Question
TechStart is a 2-year-old software company with $2M revenue, no profits yet, but strong growth. No public comparables exist. For an investor's decision, which approach would work best?
A. Asset-based (lots of office equipment)
B. Market-based (find similar private deals)
C. Income-based (project future profitability)
D. All approaches equally
Suggested Answers
- A
- B - Correct
- C
- D
