Business Valuation Market Approach

business valuation market approach

There are three conceptually distinct methodologies that can be applied when performing business valuations or asset appraisals: (a) the income approach, (b) the market approach, and (c) the cost approach.

The market approach considers the implied pricing in third-party transactions of comparable businesses or assets.  Transactions are analyzed in order to identify pricing patterns or trends that can be used to infer value on the subject business or asset.  Adjustments are made to the transaction data to account for relative differences between the subject and the comparable transactions.  The market approach is most applicable to highly homogeneous assets or businesses for which a ready market exists.

Market Approach Methods:

Guideline Public Company Method

The guideline public company method utilizes the premise that the value of a minority interest in a business enterprise is determined by what knowledgeable and rational capital market investors actually pay to own minority interests of stock in similar companies. Comparable companies are selected only from companies that are traded on organized capital market exchanges (the New York Stock Exchange, American Stock Exchange and over-the-counter markets).

Comparable companies must be engaged in the same or similar line of business as the subject company.  When selecting comparable companies, the following factors must be considered: business type, products and services, markets, business structure, diversification, geographical reach, performance, size, growth, profitability and financial ratios. However, guideline public company method analysis is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the fair market value of the companies to which they are being compared.  The guideline public company method requires qualitative judgments of comparability between the guideline companies and the subject company.

Merger and Acquisitions Method

The merger and acquisition method (transaction method) is founded on the concept that detailed private company financial data is unlikely to be available but transaction value does become available, and, on such occasion, the transaction’s implied valuation multiples can be used as a tool to provide a valuation for other similar companies. Typically, this is a controlling and marketable interest, but it could be the opposite being value as well – non-controlling and non-marketable. The transaction target company must be similar to the company being valued in at least some respects and one must be able to obtain sufficient details from which to calculate valuation multiples. If at least one of the parties of the transaction is publicly traded, relevant information is often available.

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