One must forecast future earnings and assess risk. Earnings forecasts depend on the industry and the economic outlook for the business' products, current and future competition, projected changes in demand and the business' capacity to grow in light of its past financial and operational performance. Forecasts and risk assessment require in-depth research and analysis and due diligence. Effective and reliable valuations depend on excellent research and creativity. One must forecast revenues, expenses, profits and cash flows.
Risk assessment is perhaps the most important aspect of the analysis.
The higher the discount rate the riskier the business. The second method is the comparable or guideline company approach. The data can be the price per share at the date of value of publicly- held stock or the terms of publicly announced mergers and acquisitions. The valuation multiples derived therein inherently represent the financial markets' expectations of future earnings and assessments of risk. The appraiser analyzes the multiples to determine which ones are applicable to the subject company.