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  • Valuation approaches

    There are several approaches you can take to valuing a business, security or intangible asset. These are usually categorised as:

    The most suitable approach depends on the context and purpose of the valuation and the particular characteristics of the item being valued. Often, you will combine several valuation approaches to value an item.

    Market

    To apply the market-based approach, you analyse transactional or trading data based on information typically found in the public domain. This information may include licensing agreements, mergers and acquisitions, capital raisings, divestments and on-market transactions.

    The 'comparable transaction' and 'comparable trading' methods are examples of the market-based approach. These are often used to derive or assess a market value for securities.

    Income

    To apply the income-based approach, you determine the market value of an item by estimating the economic benefits (such as cash flow or earnings) that will be derived from that item for either a finite or perpetual term. This approach often overlays evidentiary factors (such as price or earnings multiples available from the public markets) with more subjective factors (such as estimated earnings). The 'capitalisation of earnings' (often categorised as a market-based method) and 'discounted cash flow' methods are examples of the income-based approach.

    Asset

    The asset-based approach is typically used to derive the market value of a business, usually as a going concern or on a liquidation basis. This approach is commonly used (on a going-concern basis) for valuing holding and investment companies.

    Cost

    The cost-based approach can be used to derive market value where market or income factors are difficult to obtain or estimate reliably (for example, for some intangible assets). The cost approach is normally categorised into two methods:

    • replacement cost (in basic terms, the cost of replicating functionality)
    • reproduction cost (in basic terms, the cost of recreating the asset).

    Probabilistic

    The probabilistic approach is often used to derive a valuation based on a range of outcomes or discrete events. This approach is commonly used to value an item where there are several layers of uncertainty and co-dependability (for instance, from a budgetary, time or variables perspective).

    Probabilistic approaches are often used to value items such as research and development, mining projects or the option-embedded elements of securities. Simulation analysis (for example, Monte Carlo) and lattice-based models (also known as decision-tree analysis) are examples of the probabilistic approach.

    The approaches described above are only the first step in deriving the value of an item. When determining the market value of something for tax purposes, you need to take into account additional factors according to the thing being valued.

    See also:

      Last modified: 18 Aug 2017QC 21245