What are the Limitations of the Income Based Approach?
Despite its advantages, the income based approach also has some limitations:
Complexity: The approach requires detailed financial projections and a thorough understanding of the business's financials, making it complex and time-consuming. Sensitivity to Assumptions: The valuation is highly sensitive to the assumptions made regarding future earnings and discount rates, which can introduce uncertainty. Not Suitable for All Businesses: It may not be appropriate for businesses with highly volatile or unpredictable earnings.