What Does Market Approach Mean?
The market approach is a valuation method whereby a valuator determines the fair market value of the target company by reviewing actual transactions of guideline or comparable companies. Both merger and acquisition activity and stock market activity are considered in deriving various value measures to apply to the target company.
Divestopedia Explains Market Approach
The market approach is a prospective valuation method because it uses value measures which are based upon the prices of publicly traded stocks and prices of actual transactions for the purchase and sale of companies in the target company's industry or similar industries. The prices are prospective because both the purchasers and vendors are motivated to value and transact on the basis of expected future benefits associated with share ownership.
In using this approach, the following two areas should be scrutinized to ensure that a proper valuation conclusion is reached:
Are the comparable companies used as guidelines truly comparable to the subject company? If the company being valued generates $50 million in revenue, a public company with $1 billion in revenue may not be a true comparable.
Are the right valuation multiples derived from M&A and stock market actively being applied to the metrics of the subject company? A TTM EBITDA multiple derived from a comparable transaction should not be applied to NTM EBITDA of the company being valued.