Market Value Approach
Market Value Approach follows the concept that the value of the b. Guideline Public Company Data
business can be determined by reference to reasonably The guideline public company method involves identifying
comparable guideline companies for which transaction values are comparable company and obtaining the stock price for the
known. company's listed securities.
The values may be known because these companies are publicly The advantage of this method lies in the availability of a large set
traded or because they were recently sold, and the terms of the of recent data. However, it might not be very appropriate in
transaction were disclosed. valuing early-stage and/or small businesses.
The business valuation methods under the market approach that In using public company data to value private companies, proper
are typically used in professional business appraisals include adjustments must be made to the benchmarks being used on
comparative transaction method/comparative private company account of size, growth potential, capital structure, business life
sale data method, guideline publicly traded company method cycle (i.e. early stage or maturity), etc.
and use of expert opinions of professional practitioners.
c. Prior Transactions Method
All business valuation methods under the market approach fall The prior transaction method involves looking up historical
within one or more of the following categories. It is either based transactions in securities of the business undervaluation. The
on statistics/empirical or heuristics or combination of these valuation might be for minority stake such a historical stock
methods. quote from a listed stock exchange or it might be for a majority
stake such a merger and acquisition transaction involving the
Empirical/Statistical Approach – generally uses research and business.
database processing in order to come up with conclusion and Additional considerations in selecting prior transactions as a
recommendation. The approach requires references and benchmark include the timeline of the transaction, the economic
evidences to support the determination and evaluation situation at the time of the transaction, etc.
Transactions data can be obtained by finding out the exact Comparable Company Analysis
industry of the business under consideration using the established In Financial Management, financial ratios are used as tools to
industry classification methods and searching valuation databases assess and analyze business results.
for historical valuation evidence. A number of publications collect These financial ratios are P/E Ratio, Book to Market Ratio,
and disseminate information on transactions. Most publications Dividend Yield Per Share and EBITDA Multiple.
make their databases accessible on the Internet for free on a per- Ratios or multiples are useful tools for doing comparative
use basis or annual subscription access. Among the most widely company analysis. The advantage of having ratios and multiples
used are: is that it creates better and relevant comparison knowing that
• Institute of Business Appraisers (IBA) opportunities or investments have distinct drivers of their
• BIZCOMPS® performance.
• Pratt's Stats Comparable company analysis is a technique that uses relevant
• Done Deal drivers for growth and performance that can be used as proxy to
• Mid-Market Comps (ValueSource) set a reasonable estimate for the value of an asset or investment
• Mergerstat® prospective.
The advantage of this approach is that source data is reliable In determining the value using comparable analysis, the following
and comparable data includes sales of small businesses that can factors must be considered.
be similar the small business being valued. • Comparators must be at least with the similar operations or
The only limitation on this approach approach is that there is in the similar industry
insufficient market evidence in some industries, and it will • Total or absolute values should not be compared
require careful data selection, analysis and consistent data • Variables used in determining the ratios must be the same
reporting standards. • Period of observation must be comparable
• Non-quantitative factors must also be considered
Market Value Approach
Price-Earning Ratio – represents the relationship between the The illustration below shows as to how we got the values of
market value per share and the earnings per share. This shows Dividend Yield Ratio.
how the market perceives the value of a company as compared to
what it actually earns.
(*) Dividends per Share is computed as (Total Dividends Paid Out
The illustration below shows as to how we got the values of over a period less Any Special Dividends) and divided it by Total
Price-Earnings Ratio. Outstanding Shares
(**) MVPS used is based on the closing rate for each year
EBITDA Multiple
EBITDA or Earnings Before Interest, Taxes, Depreciation and
(*) MVPS used is based on the closing rate for each year Amortization represents the net revenue before deducting interest,
(**) EPS is computed as (Net Income less Preferred Dividends) taxes, depreciation, and amortizations expenses and after
/ Total Outstanding Shares deducting the operating expenses. EBITDA multiple is used to
calculate the company's return on investment (ROI).
Book-to-Market Ratio – is mainly used to compare company's To compute for the EBITDA Multiple, the Market Value per Share is
market value from its book value or value stated in its Statement divided by the EBITDA per share.
of Financial Position. The data used here are based on the
historical costs which results to its limitation, some values does
not represent the true of the company. It determines whether a
company is undervalued or overvalued.
To compute the Book-to-Market Ratio, Net Book Value per Share The illustration below shows as to how we got the values of
(NVBPS) is divided by to Market Value per Share (MPS). EBITDA Multiple.
The illustration below shows as to how we got the values of
Book-to-Market Ratio. (*) MVPS used is based on the closing rate for each year
(**) EBITDA per share is computed by dividing EBITDA by
outstanding ordinary
(*) Computation of NVBPS can be found on the Asset-Based
Valuation
(**) MVPS used is based on the closing rate for each year
Dividend Yield Ratio – shows the percentage of a company's
market price per share that is paid as dividends to the
shareholders. This shows how much a company is paying out in
dividends each year in relation to its market share price.
To compute for the Dividend Yield ratio, the Dividend per Share is
divided by the Market Value per Share.
