CORRELATION OF METHODS
It is important to note that under guidelines set by the “The Uniform Standards of
Professional Evaluation Practice” (Standards Rule 9-
Revenue Ruling 59-
Sometimes it will be obvious that the analyst should rely on a single approach, such as methods under the cost approach whereby earnings are insignificant to the value of the assets. An example of this would be a new enterprise with little or no longevity or profits, where projections would be meaningless. Another example would be a company that has longevity, but insignificant profits, and would be a candidate for liquidation. In other cases, it may be apparent that several methods would be appropriate for the final value conclusion. When this is the case, the Appraiser must look to the real world to determine which method or methods should receive the most weighting.
Service companies can represent a significant problem to the Appraiser in that there
are few assets that would give a buyer confidence should the Business someday fail.
In any case, risk is the most important factor to consider in an Appraisal. As
stated earlier, and acknowledged in Revenue Ruling 59-
Although assets play an important role in risk calculations, one must remember that earnings and the anticipation of an increasing income stream are the overriding factor in the purchase of a Business. The process of elimination and an analysis of methods both suggest that Discretionary Income is clearly the most representative of current market value.