If you are an investor planning to invest your capital in a business or if you are a business owner you would know the importance of business valuation. There are various ways to understand the real value of any business rather than merely studying the profits and the returns. If you choose the right approach you can make sure that you get all the information you need to apply the results. The choice of the method would depend on the occasion where the valuation is being requested. The market approach is one of the most popular methods for valuation.
If the company is being traded publicly, if the company is well established then valuation might be relatively simpler. And it can also be done at any time. If there is a sale to happen in the near future then the market approach would be a great way to know the worth of the business being sold and thus the price to quote. To put it in simple words, the market approach determines the value of the business in the perspective of the market. So, it indicates the selling price that is justified according to the market’s views about the firm. And the market approach could be done in several ways including guideline transactions method and guideline public company method. The former uses data from a comparison of similar firms’ acquisitions that had taken place recently. The latter approach uses pricing multiples which are obtained by taking a small group of peers and then projecting the results on to the actual firm.
Benefits of using the market approach
- The market approach is one of the simplest ways to determine the business value. It is also a method that has been used for a long time.
- The data used might be existing data obtained from closely similar conditions. This removes a lot of assumptions and focuses on real data
- The time taken on the whole would be less than most other methods of valuation.
Errors that are prone to occur
There are several firm-specific risks which might deter the results from the projections made by the comparison with the peers. There are several adjustments made to compare the data. Finding the most suitable acquisitions or peers to compare is the most crucial step. If the wrong analogy is made then the results would all be erroneous. And there are several cases where the company in the picture might be unique. So there might not be much data to compare from similar companies.