Valuation: The Market Approach

Introduction

The market approach is in practice, i.e. in the “real world,” by far the most widespread valuation methodology. In spite of this, the methodology has been and continues to be more or less neglected in the present body of literature. The reason that the methodology is, from a literary perspective, overlooked by academics as well as practitioners is most likely because it is generally considered, in relation to the very well-considered discounted cash flow methodology, to be a bit too simple.

The fact that the methodology is generally considered, compared with the discounted cash flow methodology, as simple should also be the reason for its popularity. Who among us has not taken the average or median value multiple, e.g. the average or median P/E or P/S ratio, from a peer group of listed companies, applied it to the relevant base metric of the valuation subject in question and taken the result to be its market value of equity? Moreover, it is not uncommon in different contexts to be told that a certain type of company, or a certain kind of business enterprise, in a given industry should be valued at, say, ten times its operating earnings (EV/EBIT 10x), 1.5 times its book value of equity (P/BV 1.5x), $0.5 million per consultant, etc. We can illustrate this problem further using the following created example:

XYZ Corporate Finance has estimated the fair market value of 100 percent of the common shares, i.e. the fair market value of equity, in the retail company ABC Corp. ...