Field Guide to Business Valuation: The Market Approach
A Field Guide to Business Valuation delivers essential context for anyone looking to learn a little more about business valuation. It includes insightful tips that will help make valuations much less daunting. One element of a valuation report that can be incredibly confusing is the market approach, which is required in every business valuation. Luckily for us the field guide is here to demystify it for us!
There are two primary market approach methods: the guideline completed transaction method and the guideline public company method. The guideline completed transaction method relies on the prices of recently sold similar companies, as illustrated in the example above. The guideline public company method uses the stock prices of similar publicly traded companies. By summing up the market value of all outstanding stock and debt, valuation analysts calculate the total value of publicly traded companies from the disparate ownership interests.
In both the guideline completed transaction method and the guideline public company method, the analyst performs the following steps:
- Identify sales of similar companies or calculate the value of similar publicly traded companies;
- Calculate relevant valuation multiples by dividing the value of each guideline company by a denominator such as revenue, operating income, EBITDA, or other value drivers; and
- Select an appropriate valuation multiple(s) from the range of indicated multiples and multiply it by the subject company financial fundamentals, indicating business value.
There are many nuances to valuing a business using the market approach, but these steps summarize the basic market approach framework. The following chapters discuss the application of each of these two methods.
This discussion of the market approach is just the beginning when it comes to understanding how to compile your valuation report. Don't miss out on what you need to know by getting your copy of A Field Guide to Business Valuation.