Why is it crucial to combine different valuation methods?

Combining different valuation methods is crucial because it allows for a more comprehensive assessment of an asset's value. Each valuation method—such as discounted cash flow analysis, comparable company analysis, or precedent transactions—has its strengths and weaknesses, and these can lead to varying estimates of value. When multiple methods are applied, it provides a range of values that can be analyzed collectively, enhancing the accuracy and reliability of the valuation.

By utilizing various approaches, investors and analysts can triangulate the value and arrive at a defensible approximation that considers different perspectives and data. This practice helps to mitigate the limitations that come with using a single method and provides a more robust basis for investment decisions. Ultimately, arriving at a defensible approximation is important for establishing credibility and justifying financial decisions, especially when presenting findings to stakeholders or in negotiations.