CHAPTER 3:

The Market Approach to

Valuation
By Kim Lorraine Mante
DEFINITION
 WHAT IS MARKET
APPROACH?
• is predicated on the concept that the value of a business is measured by a
comparison of the features of the subject of valuation with those of
reasonably comparable businesses

• observable data are collected for reasonably comparable companies and

adjustments are then made to these derived data to compensate for
differences between these companies and the subject being valued.

• establishes the value of a business by using one or more methods that

compare the subject of valuation to similar businesses, business ownership
interests or securities that are traded in a public market or have been sold
USE
WHY DO WE USE THE MARKET APPROACH?
• applied based on the premise that someone is not willing to pay
more for an asset that what the market pays for a comparable asset

• relatively simple to apply

• best used when the subject company has an identifiable earnings

trend and the capability to generate earnings that can warrant a
higher value as compared to that of its underlying net tangible assets
APPLICATIO
N
STEP 1: Understanding the Business or Industry Within Which the
Subject of Valuation Operates and Searching for Comparable
Companies

SUBJECT COMPANY
● Business description and
COMPARABLE COMPANY
● Industry,
operation,
● Business activities,
● Location,
● Business locations,
● Product,
● Geographical markets,
● Customer,
● Sizes and financial ratios.
● Quality of management,
● Competition,
● Historical financial
performance,
● Industry analysis.
STEP 2: Analysing and Computing Trading or Transaction Multiples
(Valuation Multiples)

• Equity value multiples

• Price/Book (P/B)
= price per share / book value per share
• Price/Earnings (P/E)
= price per share / NPAT per share

• Enterprise value (EV) multiples

• Enterprise value/Earnings before interest and taxes (EV/EBIT)

• Enterprise value/Earnings before interest, taxes, depreciation and amortization

(EV/EBITDA)
 STEP 3: Selecting Appropriate Valuation Multiples
SELECTING APPROPRIATE TYPES
OF VALUATION MULTIPLES:
● Comparability of profitability
● Accounting policies of comparable
companies
● Comparability of product portfolio and
customer portfolio
● Time period consistency
● Premiums and discounts embedded in the
transacted or trading multiples
ASSESSING THE VALUATION
MULTIPLE RANGE:
● Investors’ expected rates of return
● Economic, industry, and market conditions
● Nature, size, and performance of the subject company
as compared to that of comparable companies
● Historical earnings trends and stability and quality in
forecast earnings
● Future prospects and potential growth of the subject
company
● Reputation and capability of the subject company’s
management
STEP 4: Applying Appropriate Valuation Multiples to the
Normalised Financial Results of the Subject Company

ADJUSTMENTS TO CONSIDER IN NORMALISING FINANCIAL

RESULTS:
● Non-recurring items
● Income and expense items relating to non-arms length transactions
● Income and expenses relating to non operating assets
● Changes in accounting policy during the period under review
● Goodwill and other intangible assets
● Abnormal/extraordinary items that are not part of the normal course of business
STEP 5: Making Additional Adjustments to Derive the
Valuation Range of the Subject Company

COMMON ADJUSTMENTS :
● Carried forward tax losses
● Non-core business/non-operating assets
● Investments in quoted and unquoted shares
● Favorable/unfavorable legal outcome
● Premiums and discounts
 SEASON’S
GREETINGS