The different types of valuation methodologies can be classified into three broad categories: asset-based, income-based, and market-based. Each category has its own advantages and disadvantages, depending on the purpose and context of the valuation.
Asset-based methods measure the net worth of the business, by deducting its debts from its assets. These methods are good for businesses that have a lot of tangible assets, such as buildings, machinery, or inventory.
Income-based methods measure the earning power of the business, by projecting its future cash flows and bringing them to their present value. These methods are suitable for businesses that have consistent and predictable profitability, with low investment risk and high growth potential. However, they rely on assumptions and projections that may not be accurate or realistic, and they may not reflect the market conditions or the competitive environment. Market-based methods measure the relative value of the business, by comparing it to similar businesses that have been sold or traded in the market. These methods are suitable for businesses that operate in well-established and active markets, with a sufficient number of comparable transactions. However, they may not account for the unique characteristics and circumstances of the business, such as its size, location, industry, or synergies.