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A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal by Timothy R. Lee, L. Paul Hood Jr.

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Chapter 7

The Market Approach

The market approach is a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.

Functionally, the market methodologies are similar to direct capitalization income methods in that a benefit (or performance) measure of the subject entity is converted to value by a capitalization factor. It is the specificity of the data supporting the capitalization factor that differentiates market methodology from income methodology. In general, income methodology relies on indirect, broad market rates of return on capital (Ibbotson et al.) as well as on various data sets and trends to establish growth rates. For cases in which there is more direct information from a comparable market, such information is used to develop value indications from the salient data of the subject entity. These comparable markets offer evidence of either direct- or relative-value metrics based on transaction activity among investors. Such markets can be described as direct—in that a similar ownership interest or security in the same subject entity has transacted—or as indirect—in that a group of publicly traded securities in similar companies can be observed and/or that transactions of entire entities can be observed.

The market approach subsumes various methods, which ...

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