ADAMSON UNIVERSITY

VALUATION CONCEPTS AND METHODS

VALUATION BASED ON SECURITIES PRICES
Market Value Approach

Market value approach follows the concept that the value of the business can be determined by
reference to reasonably comparable guideline companies for which transaction values are known. The
values may be known because these companies are publicly traded or because they were recently sold
and the terms of the transactions were disclosed. The business valuation methods under the market
approach that are typically used in the professional business appraisal include comparative transaction
method/comparative private company sale data method, guideline publicly traded company method
and use of expert opinions of professional practitioners.

Market-based business valuation methods are routinely used by business owners, buyers, and the
professional advisors to determine the business worth. The market approach offers the view of business
market value that is both easy to grasp and straightforward to apply. The idea is to compare your
business to similar businesses that have actually sold.

All business valuation under the market approach fall within one or more of the following categories. It
is either based on statistics/empirical or heuristic or combination of these methods.

Empirical / Statistical Approach

Empirical or statistical approach generally uses research and database processing in order to come up
with conclusion and recommendation. The approach requires references and evidences to support the
determination and evaluation. Information may take the form of Sales Data, Financial Performance, and
other historical information. Trend analysis and benchmarking may be used to process the information.
Tools are also made available to facilitate processing of large information.

Comparative Private Company Sales Data

This is an empirical approach. This formerly known as comparative transaction method. Other literature
called this as guideline transaction method or comparative business sales data. This method involves
finding out prior transactions of comparable companies. Transactions data can be obtained by finding
out the exact industry of the business under consideration using established industry classification
methods and searching valuation databases for historical valuation evidence. A number of publications
collect and disseminate information on transactions. Most publications make their databases accessible
on the Internet for free on a per-use basis or annual subscription access. An ideal guideline transaction
would be the one from a very similar company in the industry. If no direct comparison in available, other
data might be used after considering their market, products, etc.

The advantage of this approach is that source data is reliable and comparable data includes sales of
small businesses that can be similar to the small business being valued. Although the limitation of this
approach is that there is insufficient market evidence in some industries, and it will require careful data
selection, analysis and consistent data reporting standards.

Guideline Public Company Data

The guideline public company method involves identifying a comparable company and obtaining the
stock price for the company’s listed securities. Publicly listed companies (PLCs) are required to file their
financial statements electronically with the Securities and Exchange Commission (SEC). These filing are
public information and are available on the SEC website. Information are also available in the Philippine
Stock Exchange (PSE) website.

The advantage of this approach is that there are plenty of transaction data available from public capital
markets. However, it might not be very appropriate in valuing early-stage and/or small businesses. In
using public company data to value private companies, proper adjustments must be made to the
benchmarks being used on account of size, growth potential, capital structure, business life cycle, etc.

Prior Transactions Method

The prior transactions method involves looking up historical transactions in securities of the business
under valuation. The valuation might be for minority stake such as historical stock quote from a listed
stock exchange or it might be for a majority stake such as merger and acquisition transaction involving
business. Additional considerations in selecting prior transactions as a benchmark include the timeline
of the transaction, the economic situation at the time of the transaction, etc.

The advantage of this approach is that it is already a good reference for valuation, if the data is available.
Since this is heavily reliant on data, absence of a good data may not enable this approach to produce
reliable results.

Comparable Company Analysis

Financial ratios are used as tools to assess and analyze business results. Recall that one of these
purposes can be used to determine value. Ratios or multiples are useful tools for doing comparative
company analysis. The advantage of having ratios and multiples is that it creates better and relevant
comparison knowing that opportunities or investments have distinct drivers of their performance. These
financial ratios are:

 Price-Earnings Ratio – represents the relationship of the market value per share and the earnings
per share. It sends the signal on how much the market perceives the value of the company as
compared to what it actually earns.
 Book to Market Ratio – is used to determine the appreciation of the market to the value of the
company as compared to the value it reported under the statement of financial position.
 Dividend Yield Per Shares – describes the relationship between the dividends received per share
and the appreciation of the market on the price of the company. It provides the investors with
the value which they can actually get from the company.
 EBITDA Multiple – represents for the net amount of revenue after deducting operating expenses
and before deducting financial fixed costs, taxes, and non-cash items. It can serve as a proxy for
cash flows from operating activities before tax.

Comparative company analysis is a technique that uses relevant drivers for growth and performance that
can be used as proxy to set a reasonable estimate for the value of an asset or investment prospective.
In determining the value using comparable company analysis, the following factors must be considered:

 Comparators must be at least with the similar operations or in the similar industry
 Total or absolute values should not be compared
 Variables used in determining the ratios must be the same
 Period of observation must be comparable
 Non-quantitative factors must also be considered

Comparable company analysis uses tools to enable the comparison between companies given the
differences is Strategy, Structure, and Size. The objective is to enable the analyst or management
accountant to determine the value of the company based on the behavior of similar businesses in the
industry that more or less captured the risk factors and other micro and macro-economic considerations.

Heuristic Pricing Rules Method

In this method, analysts use business pricing formulas that are developed based on the expert opinion
of professionals involved in business sales. The best-known professional group that does this is the
business intermediaries that broker business sale transactions in specific industries. Their knowledge of
the marketplace and direct exposure to transactions puts these experts in an excellent position to
estimate the likely business selling price.

The advantage of this approach is that pricing multiples based on the expert opinion of active market
participants is made available. Pricing formulas are often relied upon both by practitioners and their
client business owners and buyers when pricing a deal. However, since these are based on experts’
opinion, pricing multiples may not be sufficiently backed by rigorous statistical analysis. There will also
be a concern on the availability of information for non-brokered business deals.

REFERENCE

Valuation Concepts and Methodolo:gies, Lascano, Baron, Cachero, 2021 Edition