What does the market approach primarily rely on for valuation?

The market approach primarily relies on comparable sales as its foundational basis for valuation. This method assesses the value of a business by looking at the sale prices of similar companies or assets in the market. By analyzing these comparable transactions, valuators can derive an estimate of worth based on what others have paid for similar entities under similar circumstances. This approach is particularly effective in actively traded markets where ample data is available for analysis, allowing for a more objective assessment of value based on real market activities.

In contrast, the cost to replace focuses on determining how much it would cost to replace an asset, which does not directly reflect market conditions. Projected financial statements involve future earnings, which may introduce uncertainty and subjective assumptions into the valuation process, rather than reflecting current market prices. Historical profitability analysis studies past performance to inform value estimation, yet it does not account for current market conditions and competitor activities that are critical in the market approach. Thus, the reliance on comparable sales makes the market approach a robust and market-sensitive method for valuation.