Valuation Approaches and Methods
Three families of methods exist: income, market, and asset/cost. Candidates must know when each applies and how to reconcile them.
Income approach discounts expected economic benefits to present value. Key concepts: net cash flow to the subject interest, discount rate versus capitalization rate (a cap rate equals the discount rate minus expected long-term growth in a Gordon growth model), and the mid-year convention. The build-up method constructs a discount rate from a risk-free rate plus equity risk premium plus size and company-specific premiums; WACC is used for enterprise-level cash flows. The excess earnings method (a capitalized earnings-plus-asset method) appears in intangible valuation and is a frequent trap because it blends income and asset thinking.
Market approach uses guideline public companies (with control and marketability adjustments) and guideline transactions (which may embed control premiums). Multiples must be applied consistently: EV/EBITDA to enterprise value, P/E to equity value. Matching the numerator and denominator is the classic error.
Asset-based approach values net assets, often adjusted to fair value; it is most relevant for holding companies or liquidation premises and rarely captures going-concern goodwill.
Discounts and premiums-lack of control (minority) and lack of marketability-are applied only when the subject interest and the comparable data differ on those attributes. Avoid double-counting: do not apply a minority discount to a pro-rata value already derived from minority-share pricing.
Worked example: discount rate 14%, long-term growth 4% → cap rate = 10%; next-year cash flow of $500,000 ÷ 0.10 = $5,000,000 indicated value.