Glossary

With over 200 terms in both English and French, our M&A Dictionary is designed to help you better understand the key words and concepts related to the sale oe purchase of a business in Canada.

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Income Approach

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Category: Business Valuation

Definition:

The income approach is one of the three fundamental approaches to business valuation. The other two are the asset approach and the market approach. The income approach estimates the value of a business based on its ability to generate income or cash flow in the future. This approach is rooted in the principle that the value of a business is directly related to the income it is expected to generate for its owners or investors. The income approach is widely used in the field of business valuation, and it includes several valuation methods, with the Discounted Cash Flow (DCF) method being one of the most common. Other methods in the income approach include the Capitalization of Earnings Method and the Capitalization of Cash Flow Method. The income approach is particularly relevant when valuing businesses that are expected to generate a significant and consistent level of income over time, such as established companies with a history of stable cash flows. It is commonly used in the valuation of operating businesses where the primary objective is to estimate the present value of the future income stream.