Valuation Approaches

How a Melbourne Business Is Valued: The Income, Market and Asset Approaches

Three ways of asking what a business is worth. A certified valuer weighs all of them, applies the ones that fit your business and explains why the others carried less weight.

A Melbourne business is valued using up to three approaches. The income approach asks what its future earnings are worth today, the market approach asks what similar businesses have changed hands for, and the asset approach asks what would be left if every asset and liability were restated to market value. The valuer reconciles the results and explains the weighting.

The framework

One framework, three questions

The Income Approach

What are the future earnings of this business worth in today's dollars, once the risks of receiving them are priced in?

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The Market Approach

What price have similar businesses fetched when they changed hands, and what do listed companies in the same sector trade at?

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The Asset Approach

What would remain if every asset were brought to its market value and every liability were taken off?

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Reconciliation

Bringing three results back to one number

Each method that was applied produces a low and a high, and those results are set side by side. The valuer then writes the weighting out in plain words: which approach mirrors the way a buyer would think about this particular business, which ones served as cross-checks, and which were not applied at all and why. A Fitzroy cafe with a dozen recent comparable sales nearby is weighted differently from a Dandenong South fabricator whose value sits largely in its plant.

What comes out is a range of enterprise value. From there, interest-bearing debt comes off, surplus assets and non-operating liabilities are added or removed, and the result is the equity value of 100 per cent of the business on a controlling, marketable basis. If the interest being valued is a minority stake, or one that cannot readily be sold, discounts for lack of control or lack of marketability are applied at this point and explained.

When a report is reviewed, whether by another expert, the ATO or a court such as the Supreme Court of Victoria, the reconciliation is the section read first, because it shows whether the conclusion follows from the evidence or was chosen first and justified afterwards.

The depth of that working in your own report depends on what the report is for. An Indicative valuation is for internal decision-making and is not written for third party reliance. A Summary report sets out the approaches applied and the reasoning behind them, and a Detailed report applies and reconciles all relevant approaches in full.

Indicative

For internal decision-making. Useful for testing an offer, setting an expectation before a negotiation, or deciding whether to go to market. It is not written for third party reliance.

Summary

Sets out the approaches applied, the normalisation adjustments made and the reasoning behind the conclusion. The usual choice for a sale, an ownership change or a finance application.

Detailed

Applies and reconciles all relevant approaches in full. The level required where a court, the ATO, a lender or another expert will review the opinion.

Questions

Common questions about the three approaches

Income, market and asset. Under the income approach the business is worth the present value of its future earnings or cash flow. Under the market approach it is worth what comparable businesses have sold for, or a multiple observed in comparable listed companies. Under the asset approach it is worth its assets less its liabilities, each restated to market value.
No single approach is more accurate in the abstract. Accuracy comes from matching the approach to the way a buyer would actually price that business, so a well-prepared valuation looks at all three, applies those that fit and records why the remainder were given little or no weight. A report that used only one approach without saying why is the one most easily challenged.
Not necessarily, but it has to consider them and say why any were set aside. Every engagement considers all three; not every engagement applies all three. Where one is put to one side, say because no reliable comparable transactions exist, the report records that decision and the reason. The Form 44A expert witness code of conduct under the Supreme Court (General Civil Procedure) Rules 2015 (Vic) requires an expert to state the reasons for each opinion and the facts and assumptions it rests on, which is why a Detailed report prepared for litigation shows this working in full.
Normalisation restates the reported profit to what a hypothetical owner would receive. Wages paid to the owner and family are reset to what the roles would cost on the market, rent paid to a related entity for a Moorabbin factory or a Box Hill consulting suite is restated to arm's length, one-off items such as a legal settlement or an insurance recovery come out, and income from assets the business does not need is removed and those assets valued separately. Because these adjustments are where two valuers most often part company, a defensible report lists each one with its reason.
Enterprise value is what the operating business is worth to everyone who has funded it, lenders and owners together. Equity value is the owners' share once interest-bearing debt has been deducted and any surplus assets or non-operating liabilities have been added back or taken off. A valuation reaches enterprise value first, crosses that bridge, and only then applies any discount for a minority holding or for the difficulty of selling the interest.
The economics of the business decide, not its postcode or its industry label. A Collins Street law firm earns fees from a retained client base and holds little plant, so its value sits in maintainable earnings and the income approach leads, with the market approach as a cross-check. A Dandenong South manufacturer carries heavy plant and often thin margins, so the adjusted net asset result leads or at least sets the floor, with the earnings tested against it. Every Melbourne industry page on this site names the approach that usually leads for that sector.
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