What approach to business valuation is more relevant when the likelihood of liquidation is low?

The income approach is particularly relevant when the likelihood of liquidation is low because it focuses on the present value of the expected future cash flows that a business can generate. This approach is based on the premise that the value of a business is intrinsically linked to its potential to generate profits over time, making it suitable for ongoing operations rather than assets that may be liquidated.

In scenarios where the business is expected to continue operating, the income approach considers various factors, including forecasted revenues, expenses, taxes, and capital expenditures, to derive a valuation that reflects its earning potential. This method is especially useful for service-oriented or technology companies, where assets alone may not provide a full picture of value.

The other approaches, while useful in specific contexts, may not capture the true economic value of a business that is not expected to liquidate. The asset approach primarily looks at the fair market value of a company's tangible and intangible assets, which may undervalue a profitable business that is expected to continue generating cash flows. Similarly, the market approach compares the business to similar companies, but this can often miss nuances specific to the profitability of the target business itself. The cost approach, focusing on the cost to reproduce or replace assets, is less applicable in low liquidation scenarios,