Question

Define what is meant by the earnings approach and describe, in general, the three ways in which it can be used as a way of valuing an existing business.

Answer 1

Earning approach is an approach which is used for valuation of the business according to which business value lies in its overall expected future earnings, so earnings approach is primarily centralised at total earning of the company in the future in order to value the company at current.

Three ways in which it can be used as a way of valuing an existing business as follows-

A. Earning approach can be used by various investor in order to value a business before investment by discounting the future earnings.

B. Earning approach can also be used for valuation of a startup business which does not have profits so it will be used at discounted future earnings.

C. Earning approach can also be used in respect to valuation of a business in respect to mergers and acquisitions.