Methods of Business Valuation: Earnings Value Approach

In the case of a company sale or transfer, the value of the company plays a significant role. It forms the foundation for the sale price negotiations. However, there are various methods to determine the company's value. In this post, we explain the income approach.

Income Approach

Another method to determine the value of a company is the income approach, which can also be described as a simplified method of the Discounted Cash Flow (DCF) method. In the income approach, the value of the company corresponds to the future net profits that can be generated. It is important that only adjusted profits are considered for the process. Extraordinary or non-operating revenues or expenses, or market-unrelated owner salaries, must therefore be adjusted. In the company valuation, both future and past values are considered, and different years can be weighted differently. Similar to the Discounted Cash Flow method, a discounting is also performed here; however, unlike the DCF method, the operating profits are discounted instead of net withdrawals. The discount factor corresponds in a company valuation at the equity level (net method) to the cost of equity, which reflects the risk-adjusted equity return of the company (= the return required by the investor).

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