Which valuation approach assesses business value based on previous similar sales?

The market value approach is centered on determining the value of a business by examining recent sales of similar businesses within the same industry. This approach uses comparative analysis to establish a business's worth, leveraging real-world transactional data to provide a fair estimate. It reflects the principle of supply and demand—if businesses of a similar nature have been sold for certain amounts, that market activity is indicative of what buyers are willing to pay.

This method is particularly useful in industries where comparable sales data is readily available, enabling analysts to see trends and establish benchmarks. For instance, if a small cafe was sold for $200,000 and another similar cafe sold for $220,000, the market value approach helps in framing a reasonable valuation range for a new cafe based on these transactions.

In contrast to the other approaches listed, such as the income approach, which focuses on the potential future earnings of the business, or the cost approach, which centers around the asset values and the costs involved in creating the business, the market value approach emphasizes the actual outcomes of comparable sales. The asset-based approach also differs fundamentally, as it often ties valuations to the net asset values rather than market-driven sales.