Market approach definition
/What is the Market Approach?
The market approach is a valuation method used to derive the value of an asset or business. Under this method, the prices at which similar assets have recently sold are used as the basis for an asset valuation. The amounts of these recent sales are adjusted for any differences between the characteristics of the assets sold and the characteristics of the item being valued, with an emphasis on differences in quantity, quality, and size. Outlier comparables are usually thrown out or heavily adjusted, since they may have been caused by special circumstances that do not apply to the target asset.
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When to Use the Market Approach
The market approach is commonly used to arrive at the value of real estate. It can also be used to value closely-held businesses for which there are no publicly-traded shares. For example, a realtor can collect information about comparable real estate sales in close proximity to the property owned by a client, and adjust those prices for differences in land area and building square footage to arrive at a market-based valuation for the targeted property.
Other Valuation Methods
Other valuation methods are based on either the cost to recreate an asset or the discounted cash flows generated by it. Of these two, the discounted cash flows method is more commonly used, since it is based on the actual cash inflows and outflows associated with an asset.
Terms Similar to the Market Approach
The market approach is also called the market comparison approach and the market-based approach.