Business valuation experts consider the Asset, Income, and Market approaches to valuation. The difference in approaches is as follows:
The asset business valuation approach is based on the principle of substitution that a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility. All assets and liabilities are adjusted to reflect the business as a going concern entity or the company in liquidation, depending on the premise of value appropriate for the valuation.
The income business valuation approach is based on the idea of valuing the present value of future benefits. This approach estimates business value by considering the future income accruing over a period of time. The methods most commonly used by business valuation professionals include the Capitalization of Earnings Method and the Discounted Earnings Method (Discounted Cash Flow Method).
The market business valuation approach is also based on the principle of substitution. The business valuation expert identifies business entities that have transacted as a way to compare the subject business. Sold businesses in comparison to the subject is a way to calculate value of an equally desirable company from an ownership or investment standpoint. The methods most commonly used for the market business valuation approach are the Guideline Public Company Method, Guideline Company Transactions Method, Multiple of Discretionary Earnings Method, and Gross Revenue Multiple Method.