Market Approach

What is the Market Approach?

The Market approach is a method where the value of an asset is determined based on the selling price of similar assets. This is one of the three popular valuation methods. The other two methods are the Cost Approach and Discounted cash flow Analysis.

Whatever the type of asset is being valued, the market approach studies recent sales of similar assets. Thereby it makes adjustments to the differences between them. Since the market approach depends on comparison to similar assets, it is extremely useful when there is substantial data available regarding recent sales of comparable assets.

The market approach seeks to answer a common question that asks what is the Fair Market Value of an asset. In order to answer this question, the valuator needs to read and survey recent transactions where similar assets are involved. These assets are not likely to be identical to the one which is in focus therefore, various adjustments will need to be made.

Importance of Market Approach

In markets where residential Real Estate and publicly traded shares are involved, data is available thereby making the market approach easy to employ. In markets where private businesses and shares are involved, it can become quite difficult to find transactions are comparable. On the other hand, where limited data is available the evaluator means need to depend on alternative methods such as cost approach or discounted cash flow analysis.

One of the major advantages of the market approach is that it is based on publicly available data for comparable transactions.