Business Valuation - What is the "Market Approach"?
The market approach is one of the three primary valuation approaches, along with the income and asset-based approaches. The market approach determines a value for a business by looking at multiples from similar companies which have been bought or sold and applying those multiples to the financial metrics of the subject company.
There are several methods available to apply within the market approach. The following are two of the more frequently used methods:
Guideline Transaction Method
The guideline transaction method within the market approach looks at multiples (price to revenue, price to earnings) from actual transactions of similar companies and applies those multiples to the financial metrics of the subject company. This method is most appropriate when the subject company has a higher degree of marketability and a sufficient number of guideline transactions can be identified. There are several sources for guideline transaction information, with common sources including DealStats, BIZCOMPS, and ValuSource Market Comps.
Public Company Method
The public company method looks at pricing multiples of publicly traded companies and applies those multiples to the financial metrics of the subject company. This method is most appropriate when the company is comparable with publicly traded companies in terms of revenue, margins, and other factors.
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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.