Income Approach: Understanding the Business Valuation Context

The Income Approach is a widely used method for valuing businesses in the context of business valuation. It provides an objective and quantitative approach to determine the value of a business based on its potential future income streams. This article aims to provide a comprehensive understanding of the Income Approach, including its key concepts, assumptions, and methodologies.

To illustrate the practical application of the Income Approach, let us consider a hypothetical case study. Imagine a small software development company that has been operating successfully for several years. The company generates consistent revenue through its software sales and maintenance contracts. Now, suppose that an investor is interested in acquiring this company and wants to assess its worth using the Income Approach. By analyzing the historical financial statements and projecting future cash flows, it becomes possible to estimate the company’s value based on its anticipated income-generating capacity.

In order to grasp the underlying principles of the Income Approach fully, it is crucial to explore various aspects such as discounted cash flow (DCF) analysis, capitalization rates, growth projections, risk assessments, and other relevant factors. Understanding these elements will enable professionals involved in business valuation processes to make informed decisions regarding mergers and acquisitions or investment opportunities. Therefore, this article will delve into each component of the Income Approach while highlighting their significance within the valuation process.

Discounted cash flow (DCF) analysis is a fundamental component of the Income Approach. It involves projecting future cash flows of the business and then discounting them back to their present value using an appropriate discount rate. The discount rate reflects the time value of money and accounts for the risk associated with receiving future cash flows. DCF analysis allows for a more accurate assessment of the business’s intrinsic value by considering the timing and uncertainty of future income streams.

Capitalization rates are another key element in the Income Approach. They represent the expected rate of return that investors would require to invest in a business, given its level of risk. Capitalization rates are used to capitalize the expected net operating income or cash flow of a business into a present value estimate. These rates can be derived from market data or calculated based on factors such as industry benchmarks, comparable company analysis, and risk assessments.

Growth projections play a crucial role in estimating future income streams within the Income Approach. They involve analyzing historical growth rates, industry trends, market conditions, and other relevant factors to forecast the business’s potential for expansion or contraction over time. Growth projections can significantly impact valuation results as they directly influence future cash flows and ultimately determine the business’s worth.

Risk assessments are essential when applying the Income Approach as they help evaluate the uncertainty associated with achieving projected cash flows. Risks may arise from various sources such as competition, regulatory changes, technological advancements, economic conditions, and management capabilities. Assessing these risks allows for adjustments to be made in growth projections or discount rates to reflect their potential impact on future income streams.

In conclusion, understanding each component of the Income Approach is vital for accurately valuing businesses. By properly analyzing discounted cash flows, capitalization rates, growth projections, and risk assessments, professionals can make informed decisions regarding mergers and acquisitions or investment opportunities. The Income Approach provides an objective and quantitative framework that considers a business’s potential future income streams, making it a widely used method in business valuation.

Excess Earnings Method

Excess Earnings Method

The Excess Earnings Method is a commonly used approach in business valuation that focuses on determining the value of intangible assets and goodwill. This method quantifies the income generated by these intangibles, which goes beyond what can be attributed to tangible assets such as buildings or equipment. To illustrate this concept, let us consider an example. Imagine a software company that has developed a highly popular application with millions of users worldwide. The revenue generated by this software greatly exceeds the value of its physical assets, making it an ideal scenario for applying the Excess Earnings Method.

To better understand how this method works, we will explore four key factors that contribute to the calculation of excess earnings:

  1. Tangible Asset Value: This refers to the fair market value of all tangible assets owned by the business, including land, buildings, machinery, and inventory. These values are typically determined through various appraisal techniques.

  2. Normal Rate of Return: Also known as capitalization rate or required return rate, this factor represents the expected return on investment based on industry standards and risk assessment. It reflects the opportunity cost associated with investing in similar businesses.

  3. Adjusted Average Earnings: In order to calculate excess earnings accurately, it is crucial to analyze historical financial data and adjust for any abnormal or non-recurring items that might skew the results. By using adjusted average earnings over a specific period of time, a more realistic picture of sustainable income can be obtained.

  4. Capitalized Excess Earnings: This final step involves dividing excess earnings by the normal rate of return to arrive at a capitalized value representing the worth of intangible assets and goodwill within the business.

In summary, the Excess Earnings Method provides insight into how much additional income can be attributed to intangible assets beyond their tangible counterparts when valuing a business. By considering factors such as tangible asset value, normal rate of return, adjusted average earnings, and capitalized excess earnings, this approach offers a comprehensive framework for assessing the value of intangibles.

Transitioning to the subsequent section about the “Capitalization of Earnings Method,” let us now explore an alternative approach that focuses on estimating business value based on future income streams.

Capitalization of Earnings Method

Building upon the understanding of the Excess Earnings Method, we now delve into another widely used approach in business valuation – the Capitalization of Earnings Method. This method focuses on estimating a company’s value based on its anticipated future earnings and their capitalization.

The Capitalization of Earnings Method determines the value of a business by calculating the present value of expected future earnings. It assumes that these earnings will continue at a steady rate indefinitely, incorporating factors such as growth potential, risk, and market conditions. To illustrate this concept, let us consider a hypothetical case study:

Example Scenario:
Company XYZ has consistently generated annual net income of $500,000 over the past five years. Based on thorough analysis and industry projections, it is estimated that Company XYZ can maintain this level of profitability for an extended period with minimal risks or changes to market dynamics.

  • Predictability: Investors are drawn towards businesses with stable and predictable cash flows.
  • Risk Mitigation: The method considers various risk factors associated with maintaining consistent earnings.
  • Long-Term Outlook: Investors seek assurance regarding sustainable performance beyond short-term fluctuations.
  • Market Potential: The evaluation incorporates growth prospects specific to the industry and company operations.

Additionally, presenting information visually through tables enhances comprehension and engagement. Consider this table outlining key aspects considered when applying the Capitalization of Earnings Method:

Aspects Description Importance
Historical Performance Evaluating past financial results provides insights into stability and consistency of earnings High
Growth Prospects Assessing growth opportunities within the relevant market segment Moderate
Industry Analysis Examining current industry trends, competitive landscape, and overall economic outlook High
Risk Assessment Identifying and quantifying potential risks that may affect future earnings Moderate

As we have now explored the Capitalization of Earnings Method, it is essential to further our understanding by examining another prominent valuation technique – the Discounted Cash Flow Method. This approach takes into account the time value of money, providing a more precise estimation of a company’s intrinsic worth.

Subsequent section H2: Discounted Cash Flow Method

Discounted Cash Flow Method

Transitioning from the previous section’s discussion on the capitalization of earnings method, we now delve into another commonly used approach in business valuation – the discounted cash flow (DCF) method. By estimating a company’s future cash flows and discounting them to their present value, this method provides a comprehensive assessment of its intrinsic worth.

To illustrate the application of the DCF method, let us consider a hypothetical case study involving Company X, which operates in the technology industry. Through careful analysis, projections reveal that Company X is expected to generate annual net cash flows of $1 million for the next five years. These projected cash flows are then adjusted using a discount rate of 10% to account for factors such as risk and opportunity cost. The resulting present values are summed up to determine an estimated value for Company X.

The DCF method offers several advantages over other approaches when valuing businesses:

  • It considers the time value of money by factoring in future cash flows at their present value.
  • It accounts for changes in growth rates by allowing forecasts beyond a specific period.
  • It assesses risk through discounting rates based on market conditions and industry benchmarks.
  • It provides flexibility by incorporating various scenarios and assumptions for better decision-making.

By employing this quantitative technique, analysts can gain deeper insights into a company’s potential profitability and evaluate investment opportunities more effectively.

Advantages of DCF Method
Considers time value of money

In summary, the discounted cash flow method serves as a robust tool within the income approach framework, aiding in determining fair business valuations. Its ability to capture both quantitative aspects, such as financial projections, and qualitative factors like market conditions makes it a preferred choice for many valuation professionals.

Transitioning into the subsequent section on the net asset value method, we now explore another important approach to understanding business valuations.

Net Asset Value Method

Income Approach: Understanding the Business Valuation Context

Having discussed the Discounted Cash Flow Method in detail, we now shift our attention to another commonly used approach in business valuation: the Net Asset Value Method. This method focuses on determining a company’s value by considering its net assets or equity. To illustrate its application, let us consider a hypothetical case study of Company X.

Company X is a manufacturing firm that specializes in producing high-quality furniture. Using the Net Asset Value Method, an appraiser would calculate the total value of Company X’s assets and subtract any outstanding liabilities to arrive at its net asset value. For instance, if Company X has total assets worth $10 million and liabilities amounting to $2 million, then its net asset value would be $8 million.

When employing this method, there are several factors to consider:

  • Age and condition of assets: The age and condition of a company’s assets can significantly impact their valuation. Newer and well-maintained equipment may hold more value compared to older or poorly maintained ones.
  • Liabilities: Outstanding debts or legal obligations must be accounted for when calculating net asset value. These liabilities can affect the overall worth of a company.
  • Market demand: The current market demand for specific assets within an industry can also influence their valuation. If certain types of machinery are highly sought after, they may fetch higher prices.
  • Depreciation: Over time, assets tend to depreciate in value due to wear and tear or technological advancements. Proper depreciation calculations should be applied while assessing net asset values.

Below is a table summarizing the main considerations involved in utilizing the Net Asset Value Method:

Factors Impact on Valuation
Age and condition of assets Higher quality yields greater value
Liabilities Increases deductions from overall asset value
Market demand High demand corresponds with increased valuations
Depreciation Proper calculations adjust asset values over time

Moving forward, the subsequent section will delve into the Liquidation Value Method. This method provides an alternative perspective on business valuation by considering the worth of a company’s assets if it were to be liquidated or sold in its current state.

Liquidation Value Method

Transitioning from the previous section on the Net Asset Value method, we now turn our attention to another approach within the income approach framework—namely, the Liquidation Value Method. This method assesses a business’s worth based on its hypothetical liquidation value, assuming that it is sold in an orderly manner.

To better understand this methodology, let us consider an example. Imagine a small manufacturing company facing financial distress due to changing market conditions. If the company were forced to sell off all its assets quickly and at reduced prices, potential buyers would likely take advantage of the situation and negotiate lower purchase prices for each asset. Consequently, the liquidation value might be significantly less than what could have been achieved under normal circumstances.

When employing the Liquidation Value Method as part of a comprehensive business valuation process, several factors need consideration:

  • Market Conditions: The prevailing economic environment influences buyer behavior during a liquidation sale.
  • Time Constraints: The time available for selling assets impacts pricing negotiations and may lead to suboptimal outcomes.
  • Asset Quality: Potential buyers typically scrutinize assets more closely during times of distress, resulting in lower valuations for those with perceived deficiencies.
  • Competitive Landscape: The level of competition among potential buyers affects their willingness to pay fair prices for distressed assets.

Examining these factors through a critical lens can help determine whether using the Liquidation Value Method is appropriate in specific business valuation scenarios. To illustrate further, consider the following table showcasing how different elements influence asset values during periods of liquidation:

Factors Impact
Economic Environment Buyers exploit market downturns for advantageous purchasing deals
Time Constraints Pressure on sellers results in quick sales at discounted prices
Asset Quality Deficiencies lead to lower valuations and reduced buyer interest
Competitive Landscape Increased competition can drive prices up or down

In summary, the Liquidation Value Method offers a unique perspective on business valuation by considering the hypothetical worth of assets in an orderly liquidation scenario. By analyzing various factors such as market conditions, time constraints, asset quality, and the competitive landscape, one can gain valuable insights into potential outcomes when selling off a distressed business’s assets.

Transitioning smoothly to our next section on the Defensive Value Method, we explore yet another approach within the income approach framework that focuses on evaluating businesses from a defensive investor’s standpoint.

Defensive Value Method

Building upon the concept of valuing a business from its liquidation perspective, we now delve into another valuation method known as the Defensive Value Method. This approach takes into account various factors that contribute to the long-term sustainability and growth potential of a business, offering investors a more comprehensive understanding of its value.

Defensive Value Method:

The Defensive Value Method is primarily focused on identifying businesses with strong defensive characteristics that can withstand economic downturns and market fluctuations. It considers elements such as stable cash flows, consistent profitability, and low financial risk. To illustrate this point, let’s examine a hypothetical case study:

Example Scenario:
Imagine a company operating in the healthcare industry that provides essential medical supplies to hospitals. Despite economic uncertainties or changes in consumer behavior, this company maintains steady demand for its products due to their critical nature within the healthcare ecosystem.

Key Considerations:
When applying the Defensive Value Method, there are several aspects worth considering:

  • Consistent Demand: A business with reliable customer demand irrespective of external circumstances.
  • Financial Stability: Companies with solid balance sheets and minimal debt obligations tend to fare better during challenging times.
  • Competitive Advantage: Businesses possessing unique strengths or patents have an edge over competitors even during periods of economic instability.
  • Market Positioning: Companies holding dominant positions within their respective markets exhibit greater resilience against competition.

Table – Key Factors Influencing Defensive Value:

Factors Description
Stable Cash Flows Steady revenue streams unaffected by market volatility
Profitability Consistently generating profits despite changing conditions
Low Financial Risk Minimal levels of debt and healthy liquidity ratios
Industry Resilience Operating in sectors less susceptible to economic downturns

Determining Value through Excess Earnings:

By utilizing the Defensive Value Method, investors can gain insights into a company’s long-term potential and its ability to generate excess earnings. This approach allows for a more holistic assessment of a business’s value by considering factors beyond mere liquidation worth.

In the subsequent section, we will explore another valuation method known as Determining Value through Excess Earnings, which takes into account a company’s historical financial performance to project future profitability and estimate its overall value.

Determining Value through Excess Earnings

Building upon the concept of defensive value, another approach to determining the worth of a business is through excess earnings. This method focuses on quantifying the additional profits generated by a company beyond what can be attributed to its tangible assets alone. By recognizing the intangible factors that contribute to a firm’s success, this approach provides a more comprehensive understanding of its value. To illustrate how this works in practice, let us consider an example.

Imagine a software development company with strong intellectual property rights and a loyal customer base. Despite having limited physical assets, it consistently generates higher-than-average profits due to its innovative products and excellent reputation within the industry. The excess earnings approach aims to capture and evaluate these intangible aspects to determine the true economic value of such businesses.

Paragraph 1:
In order to assess excess earnings accurately, several key considerations come into play:

  • Brand Equity: A well-established brand name creates trust among customers, leading to increased sales and price premiums.
  • Customer Relationships: Long-standing relationships with clients translate into repeat business opportunities, reducing marketing costs while ensuring consistent revenue streams.
  • Intellectual Property: Patents, trademarks, copyrights, or trade secrets provide legal protection against competitors’ replication attempts and allow for exclusive market advantages.
  • Market Positioning: Being recognized as an industry leader often leads to preferential treatment from suppliers and favorable access to distribution channels.


Key Considerations Impact on Excess Earnings
Brand Equity Increased Sales
Customer Relationships Reduced Marketing Costs
Intellectual Property Exclusive Market Advantages
Market Positioning Favorable Access to Distribution Channels

Paragraph 2:
By analyzing these factors alongside traditional financial metrics, such as revenue and expenses, the excess earnings approach allows for a more comprehensive evaluation of a business’s potential. This method acknowledges that value creation extends beyond tangible assets alone, emphasizing the importance of intangible resources in generating sustainable profits.

With an understanding of how excess earnings contribute to a company’s valuation, we can now explore another approach: calculating value using capitalization of earnings. In this next section, we will delve into the intricacies of assessing a firm’s worth based on its future income potential.

[End of section]

Calculating Value using Capitalization of Earnings

Having explored how value can be determined through excess earnings, we now turn our attention to another method in the income approach framework – calculating value using capitalization of earnings. This method provides valuable insights into estimating a business’s worth based on its expected future income generation potential.

Calculating Value using Capitalization of Earnings:

To illustrate this concept, let us consider an example scenario. Imagine a thriving software development company that has consistently generated annual profits of $1 million over the past five years. By applying the capitalization rate of 10%, we can estimate its total value as follows:

Value = Annual Profits / Capitalization Rate
= $1,000,000 / 0.10
= $10,000,000

This simplistic calculation showcases how capitalizing earnings allows investors and appraisers to assess the present value of anticipated cash flows derived from a business’s continuous profitability.

When employing the capitalization of earnings method for valuation purposes, several factors come into play. These include:

  • Growth Rate: The projected growth rate in earnings is crucial in determining the long-term sustainability and expansion prospects of the business.
  • Risk Assessment: Conducting a comprehensive risk analysis helps identify potential uncertainties that may impact future profits.
  • Industry Standards: Comparing financial performance against industry benchmarks aids in understanding competitiveness and market positioning.
  • Quality of Financial Statements: Ensuring accurate and reliable financial statements provide a sound foundation for making informed valuation decisions.

The table below summarizes these key considerations while utilizing the capitalization of earnings approach:

Factors Importance
Growth Rate High
Risk Assessment Medium
Industry Standards Medium
Quality of Financial Statements High

By carefully evaluating these factors and assigning appropriate weightage, investors can arrive at an estimated value that aligns with the business’s future earning potential.

In preparation for the subsequent section on estimating value through discounted cash flows, it is important to note how capitalization of earnings serves as a fundamental step in comprehending a company’s intrinsic worth. This method provides valuable insights into the anticipated financial returns while accounting for various growth prospects and risk considerations. Now, let us delve further into the process by exploring how discounted cash flows facilitate accurate valuation estimates.

Estimating Value through Discounted Cash Flows

Building on the concept of calculating value using capitalization of earnings, we now turn our attention to estimating value through discounted cash flows. By adopting this approach, business valuations can incorporate a more comprehensive analysis that takes into account projected future cash flow streams and their present values.

To illustrate the potential impact of discounted cash flows in determining business value, let’s consider an example involving a technology startup. Suppose Company X has been generating consistent annual revenue growth over the past three years and is expected to continue expanding its market share in the foreseeable future. By examining historical financial data and forecasting future cash flows, analysts can estimate the net present value (NPV) of these anticipated income streams.

Key factors influencing the estimation process include:

  • Revenue projections: Accurate predictions about future sales figures are essential for evaluating a company’s ability to generate sustainable cash inflows.
  • Cost assumptions: Understanding cost structures helps determine profit margins and establish realistic expectations regarding expenses.
  • Interest rates: The discount rate applied reflects both general economic conditions and specific industry risks associated with investing in similar businesses.
  • Terminal value determination: Estimating the terminal value accounts for long-term growth beyond explicit forecast periods and adds additional worth to the valuation model.

Consider how employing discounted cash flows enhances business valuation analyses by:

  • Providing a forward-looking perspective that considers expected future performance.
  • Enabling comparisons against alternative investment opportunities or acquisition targets.
  • Emphasizing long-term sustainability rather than short-term profitability alone.
  • Facilitating sensitivity analysis to assess potential impacts of changing variables on valuation outcomes.

Table – Valuation Factors Comparison:

Factor Capitalization of Earnings Discounted Cash Flows
Forward-looking No Yes
Consideration Short-term profitability Long-term sustainability
Flexibility Limited Extensive
Sensitivity analysis Less feasible More feasible

Having explored the income approach through capitalization of earnings and discounted cash flows, we now turn our attention to another valuation method: valuing a business based on net asset worth. By shifting the focus from future earning potential to the company’s tangible assets, this approach provides an alternative perspective in determining value.

Valuing a Business based on Net Asset Worth

Having explored the process of estimating value through discounted cash flows, we now turn our attention to another method used in business valuation – valuing a business based on net asset worth.

Valuing a business based on net asset worth involves determining the value by considering the company’s tangible assets and liabilities. This approach is particularly useful when assessing businesses that do not generate substantial future cash flows or have limited growth potential. To illustrate this point, let us consider an example:

Imagine a small manufacturing company that has been experiencing declining sales over the past few years. Despite these challenges, it owns valuable machinery and real estate properties. By evaluating the market values of its assets and deducting any outstanding debts or liabilities, one can arrive at an estimate of the business’s net asset worth.

When using this approach, several factors need to be taken into account:

  • Asset Inventory: A comprehensive inventory of all tangible assets held by the business needs to be conducted. This includes equipment, property, vehicles, and other resources.
  • Market Values: The current market values for each asset should be determined. These values may fluctuate depending on various economic factors.
  • Liabilities: Any outstanding debts or obligations must be considered when calculating the net asset worth.
  • Depreciation: Adjustments for depreciation should be made to reflect the true value of aging assets accurately.

To further understand how this approach works, consider Table 1 below as an overview of a hypothetical company’s net asset valuation:

Table 1:

Assets Market Value
Machinery $500,000
Real Estate $700,000
Vehicles $100,000
Total Assets $1,300,000


  • Outstanding Loans $200,000
  • Accounts Payable $50,000
  • Total Liabilities $250,000

Net Asset Worth: $1,050,000

By evaluating the net asset worth using this approach, analysts can gain valuable insights into a business’s underlying value and potential investment opportunities.

Moving beyond valuation based solely on assets and liabilities, another method that provides valuable insights is determining value through liquidation analysis. This approach dives deeper into assessing a company’s financial standing in different scenarios.

Determining Value through Liquidation Analysis

Income Approach: Understanding the Business Valuation Context

Valuing a business based on net asset worth provides one perspective on its value, but it may not capture the full potential and earning capacity of the enterprise. In contrast, the income approach takes into account future expected cash flows generated by the business to determine its value. By evaluating the income-generating capabilities of a company, this approach offers a more comprehensive understanding of its worth.

For example, consider a technology startup that has not yet turned a profit but possesses innovative intellectual property rights. Although its net asset worth might be relatively low due to limited tangible assets, investors recognize the potential for significant future earnings through licensing agreements or product sales. The income approach allows analysts to incorporate these projections and assess the long-term profitability of such enterprises accurately.

To apply this valuation methodology effectively, several key factors must be considered:

  • Cash flow analysis: This involves forecasting future cash inflows and outflows attributable to the business’s operations over a specific time horizon. By carefully assessing revenue streams, operating expenses, and capital expenditures, analysts can estimate net cash flows available to stakeholders.
  • Discounting rate determination: To ascertain present values of future cash flows appropriately, an appropriate discount rate should be selected. This rate reflects both the risk associated with investing in the business and alternative investment opportunities available in comparable markets.
  • Terminal value estimation: Since most businesses are assumed to have finite lives, determining their terminal values is crucial for accurate valuations using the income approach. Analysts commonly employ methods like perpetuity growth models or exit multiples based on industry benchmarks to estimate this component.
  • Sensitivity analysis: Given uncertainties surrounding projected cash flows and discount rates used in valuations, conducting sensitivity analyses becomes crucial. Assessing how changes in key assumptions affect overall valuation results helps mitigate risks associated with varying scenarios.

The following table illustrates an example scenario where different combinations of forecasted cash flows and discount rates result in varying valuations for a hypothetical business:

Cash Flow Forecast Discount Rate Valuation
Low High $1,000,000
Moderate Moderate $2,500,000
High Low $5,000,000
High High $10,000,000

By employing the income approach and carefully considering these factors, investors and analysts can gain valuable insights into the future earning potential of a business. This comprehensive understanding facilitates informed decision-making regarding investments or acquisitions.

Transitioning to the subsequent section about “Applying the Defensive Value Approach,” it is essential to explore alternative valuation perspectives that emphasize risk mitigation strategies alongside earnings potential.

Applying the Defensive Value Approach

Having explored the process of determining value through liquidation analysis, we now shift our focus to another valuation approach known as the defensive value approach. This method takes into account a company’s future income potential and its ability to generate sustainable profits over time. By understanding this approach, investors can gain valuable insights into a business’s true worth.

Section – Applying the Defensive Value Approach:

To better comprehend how the defensive value approach is applied in practice, let us consider an example involving Company XYZ, a manufacturing firm specializing in electronics. Through thorough research and financial analysis, it becomes evident that Company XYZ possesses several characteristics indicative of long-term success.

  1. The following bullet point list highlights key factors considered when applying the defensive value approach:
  • Consistent revenue growth over multiple years.
  • Strong market position with limited competition.
  • Diversified product portfolio catering to various consumer needs.
  • Robust management team with proven industry expertise.

These factors contribute to establishing Company XYZ as a potentially lucrative investment opportunity under the defensive value framework.

Furthermore, a comparative table showcasing different companies’ financial metrics within the electronics manufacturing sector further supports our evaluation using the defensive value approach:

Company Revenue Growth (%) Market Position Product Portfolio Diversity Management Expertise
Company A 4 Moderate Limited Experienced
Company XYZ 8 Strong Diverse Robust
Company C 5 Moderate Limited Experienced

By analyzing such data points objectively, investors can make informed decisions based on a company’s potential for long-term profitability and stability.

In conclusion, the defensive value approach provides investors with a framework to evaluate businesses beyond their current financial state. By incorporating factors such as revenue growth, market position, product diversity, and management expertise, this method enables a deeper understanding of a company’s intrinsic worth. Through thorough analysis and comparison within the industry, investors can identify opportunities that align with their investment objectives and risk appetite

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