Question

In 150 words or more: Which of these approaches do you think you would use in valuing a small business? Give your reason as to why you chose the one you selected

                                        Asset based approach

                                        market approach

                                        income approach

Answer 1

The income based approach is most suitable for a small business. This uses discounted cash flows to value the business. This method assume that the business will experience stable growth and so it can be used for small private businesses which are expected to have smooth and study profits every year.

This is more suitable than the market approach since market comparables from public firms may not be available. It is also more suitable than the Asset approach because it considers the earning potential of the business rather than just its Assets on the balance sheet.