Overview of Market-based Approaches
Market-based approaches value the business based upon the productive characteristics of the business in a given market. These methods focus on comparisons of like businesses, transactions, or industries (known as comparables or comps). Most of these methods focus on identifying a value-based, characteristic of the comparable and comparing it to the total price or value of the firm (i.e., Value-based Characteristic / Total Value of Outstanding Share). The ratio of this value-based characteristic to price is used to value businesses with similar productive output, involved in similar transactions (the reason for valuation), or operating within the same industry. In summary, these methods attribute a value to a business by using ratios (value characteristic to price) to compare the firm being value with other firms whose value is readily determined.
Using market-based valuation methods raises numerous questions, including: What type of comparable is available and most accurate? Under what circumstances will the assets of the comparable and subject firms sell for the same multiple?