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Middle Market M: Handbook for Investment Banking and Business Consulting by Michael R. Nall, Christian W. Blees, Robert T. Slee, Kenneth H. Marks

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CHAPTER 17

Market Valuation

This chapter presents a practical approach to valuation as applied to middle market mergers and acquisitions (M&A).a In this context, market value is the highest value of a business in the marketplace. If an owner says his business is worth a certain price, he is generally referring to this value world (see Chapter 2 for a refresher on value worlds). These valuations determine possible open market selling prices for a business interest. An alternative method being used in middle market M&A is referred to as Transaction Valuation; an overview is provided in the appendix.

Every company simultaneously has at least three market values. This explains why market value, much like all of business valuation, is a range concept. Each market value level is called a subworld. A subworld represents the most likely selling price based on the most likely investor type. The subworlds are: asset, financial, and synergy. The asset subworld reflects what the company is worth if the most likely selling price is based on net asset value. This is because the most likely buyer bases his or her purchase on the company's assets—not on its earnings stream. The financial subworld reflects what an individual or nonstrategic buyer would pay for the business. With either buyer type, the appraisal relies on the company's financial statements as the main source of information. The synergy subworld is the market value of the company when unintended benefits from a possible acquisition ...

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