This article is part of the reference collection published by Harper James. The appropriate valuation method depends first on why the valuation is required. A sale, investment round, shareholder exit, tax assessment, litigation matter and insolvency review each require different evidence and assumptions. Define the valuation date, the interest being valued, such as a minority shareholding or the whole business, and whether the business is assessed as a going concern.
The market approach compares the business with similar companies or completed transactions. Common measures include revenue, earnings before interest, tax, depreciation and amortisation, and sector-specific metrics. This method works best where reliable comparable data exists and the businesses are sufficiently similar in size, risk, growth and business model.
The income approach values the business by estimating future economic benefits and converting them into a present value. A discounted cash flow model projects revenue, costs, capital expenditure and working capital, then applies a discount rate that reflects risk. A capitalisation of earnings method applies a suitable multiple to maintainable profits. These methods require well-supported forecasts and careful treatment of exceptional or owner-specific costs.
The asset approach focuses on the value of the business's assets minus its liabilities. It is commonly relevant to asset-heavy businesses, holding companies and businesses where profits do not provide a reliable basis for valuation. Adjustments may be needed for property, stock, intellectual property, debt, contingent liabilities and the difference between book value and market value.
A robust valuation often uses more than one method. For example, an adviser may use a market multiple as the primary method, then test the result against a discounted cash flow model and an adjusted net asset value. Differences between the outcomes should be explained rather than averaged without analysis. The valuation report should record the assumptions, source data, normalisation adjustments, growth rates, discount rate, selected multiples and sensitivity to changes in those inputs.
The final choice should reflect the business's trading history, forecast reliability, asset base, sector, ownership structure and the quality of available comparable evidence. Valuation is not simply a calculation. It is an assessment supported by a defined purpose, consistent assumptions and evidence that can be reviewed by the parties relying on it.