How can you account for industry changes in an income approach analysis?

2 Adjust the growth rate

The growth rate is one of the key inputs in the income approach, as it reflects the expected increase or decrease in the revenues and cash flows of the business over time. To account for industry changes, you may need to adjust the growth rate based on the historical, current, and projected trends and forecasts for the industry. For example, if the industry is experiencing a decline or a slowdown, you may need to lower the growth rate to reflect the reduced demand or market share. Conversely, if the industry is expanding or innovating, you may need to increase the growth rate to capture the potential opportunities or competitive advantages.

3 Adjust the discount rate

The discount rate is another important input in the income approach, as it reflects the required rate of return or the opportunity cost of investing in the business. To account for industry changes, you may need to adjust the discount rate based on the risk and uncertainty associated with the industry. For example, if the industry is facing increased competition, regulation, or disruption, you may need to increase the discount rate to reflect the higher risk or volatility. Alternatively, if the industry is stable, mature, or diversified, you may need to decrease the discount rate to reflect the lower risk or variability.

4 Adjust the terminal value

The terminal value is the final input in the income approach, as it reflects the value of the business at the end of the projection period. To account for industry changes, you may need to adjust the terminal value based on the long-term assumptions and expectations for the industry. For example, if the industry is expected to grow or decline at a different rate than the economy or the market, you may need to use a different growth rate or multiple to estimate the terminal value. Similarly, if the industry is subject to significant changes or uncertainties in the future, you may need to use a different method or factor to estimate the terminal value.

5 Validate and update your analysis

The last step is to validate and update your income approach analysis based on the industry changes. You can do this by comparing your results with other valuation methods, such as the market approach or the asset approach, or with other sources of information, such as comparable transactions, peer companies, or industry benchmarks. You can also perform sensitivity analysis or scenario analysis to test how your results change under different assumptions or conditions. Finally, you should update your analysis periodically to reflect the latest industry changes and data.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?