In countries that boast a developed market economy, when evaluating a business, the so-called income approach is used. Its essence is believed in the analysis of the stream of income that is brought from the side of the enterprise. It is built on a statement that says that the valuation of an enterprise is equivalent to the amount that it actually will bring in the future. In order to implement a full-fledged profitable method, it is necessary not only to build a future cash flow model, but also the current value of the cash flow that a certain businessman brings to his enterprise.
The methods to be used in the income approach can be confidently divided into two main groups .
- The first includes those methods that are based on recalculating the future annual income of a certain company into their present value.
- But to the second, many modern experts refer to methods based on a special form of accumulation of average income.
In our modern society, a more correct result of business valuation can be given by those methods that are more based on discounting income. All this can be easily explained by the fact that the capitalization method in the future will assume that the absolute majority of the company's annual income will be approximately the same, in some cases they may have a constant average annual growth rate. The main task of this method is to determine the level of income, which in the future will be used as capital.
