Market Approach
Core concepts
The market approach derives value from market evidence: guideline public companies, comparable transactions (M&A), and prior transactions in the subject company's own shares. Two methods: guideline company method (multiples from public companies applied to the subject) and guideline transaction method (multiples from acquisitions of similar companies, often including a control premium).
Select and adjust comparables for size, growth, profitability, leverage, and risk. Choose the multiples: EV/EBITDA, EV/EBIT, EV/revenue, price/earnings, price/book. Match the multiple's numerator to the subject's metric-EV multiples require enterprise-level metrics, equity multiples require equity metrics. Apply the multiple to the subject's normalized metric, then adjust for differences (size, growth, margins) via qualitative or quantitative adjustment. Public company multiples are typically minority, marketable; transaction multiples are typically control.
Traps
- Applying an EV multiple to net income or a P/E to EBITDA.
- Mixing control and minority data without adjusting for the premium.
- Using unadjusted comparables despite material size or growth differences.
- Applying multiples to unnormalized earnings.
- Small sample size or stale transactions-disclose limitations.
- Ignoring that public comparables are more liquid than the subject.
Worked rule of thumb
Guideline EV/EBITDA median = 7.0×. Subject normalized EBITDA = $2,000,000. Indicated EV = $14,000,000. Subtract debt of $3,000,000, add cash of $500,000 → equity value ≈ $11,500,000 before any marketability or control adjustment.
Exam strategy
Confirm the multiple's numerator and denominator are consistent, then confirm whether the resulting value is enterprise or equity before applying discounts.