Income Approach vs Market Approach

The choice between the income approach to valuation and the market approach depends on the specific circumstances of the valuation and the availability and quality of data.

The income approach to valuation is based on the present value of the expected future cash flows generated by an asset. This approach is most appropriate when valuing income-producing assets such as operating businesses, rental properties, commercial real estate, or businesses with stable and predictable cash flows. The income approach is especially useful when there is limited comparable market data available or when market data may not be reliable due to a lack of transaction volume, seasonal variations, or other factors.

The market approach, on the other hand, is based on the prices of comparable assets in the market. This approach can be appropriate when valuing assets that are frequently traded or when there is a robust market for the asset being valued and reliable data on comparable sales or prices is readily available.

In general, it is important to consider both approaches and weigh the strengths and weaknesses of each when selecting a valuation method.