“Courts have consistently held that the use of actual market data is the preferred method to value an asset,” Judge Sontchi writes in his ABI Law Review article, referenced above. At the same time, he recognizes that “finding similar and comparable assets and/or firms is the challenge” of any such “relative” valuation. “Given that no two companies are exactly alike in terms of risk and growth, the definition of comparable firms is a subjective one,” he says. “Consequently, a biased analyst can choose a group of [comparables] to confirm his or her biases about a firm’s value.”

Another problem, Sontchi says, is that the market might err in valuing the comparables—e.g., the current tendency to overvalue software companies. Although experts try to control for the differences between the selected benchmarks and the subject company, the multiples are “easy to misuse and manipulate, especially when comparable firms and comparable transactions are used.”

Get current on the most credible uses of the market approach in today’s turbulent times: On August 2, join Robert Schlegel (Houlihan Valuation Advisors), Alina Niculita (Shannon Pratt Valuations), and Chris Treharne (Gibraltar Business Appraisal) for The Market Approach Today: Deciphering Messages From Markets, Courts, and Common Appraisal Errors.