There are a number of valuation methods that may be used by a valuation analyst under the market approach. The methods are named according to the source of known values that are used as guidelines. The two main valuation methods that are used under the market approach are:
1. Public Company Comparable
The Public Company Comparable Method entails using valuation metrics from companies that have been traded publicly, which are considered to be rightly similar to the subject entity. In most situations, direct comparability is hard to attain since a majority of public companies are not only larger but also more dissimilar to the subject. Nonetheless, the direct comparability threshold should be a little flexible so that public companies that have comparable business features are not excluded from giving guidance on the subject company’s valuation.
Direct comparability can be readily achieved in comparatively few industries. Most of them are faced with challenges of scalar differences existing between most private enterprises and public operators. The process of selecting, adjusting, and applying public company valuation data is usually complex and needs significant experience and appraiser skill. Guideline companies are usually companies that have been traded publicly in a similar or equivalent industry as the subject company. They should also have a practical basis for comparison to the subject of evaluation because of resemblances in demand and supply factors, operational processes, and financial composition.
2) Precedent transactions
This type of method involves deriving the value with the help of pricing multiples. These are usually based on the companies’ observed transactions concerning the subject company. This type of method pre-assumes the fact that the financial data are not available easily but there is surely the transaction value that is available already. Now to analyze the precedent transaction the best method is to go through the process of the conventional classification. Also one needs to evaluate the database of the valuation which may either represent a majority or the minority perspective. Now in order to have a good transaction guideline, it is necessary for it to have formed the same kind of industry. And if there is a case in which there is no method for the direct comparability, then one can also use other data, but one must not forget to consider their market or the products.
