Understanding the Market Approach in Business Valuation
Business valuation is one of the core functions of any organization. A comprehensive and reliable business valuation is required to satisfy all of the stakeholders involved in a company.
However, when it comes to selecting a specific valuation technique, companies must consider many different factors to make the right choice.
In this article, you’ll learn about the various aspects of the market approach, so keep reading.
What Is the Market Approach?
The approach used to determine an asset’s value on the basis of the selling price of similar assets is called a market approach. It is one of the most popular business valuation techniques used by various experts, including audit firms in Singapore.
It is important to note that the market approach is not dependent on the specific type of asset being valued. Instead, it analyzes the sales of similar assets in recent times. After careful analysis and consideration, relevant adjustments are made to their prices.
For instance, if you are appraising real estate, you are likely to make adjustments related to the square footage of the unit, location, facilities, etc.
5 Steps of the Market Value Approach
The exact method of the market value approach can greatly vary from situation to situation, but the common five steps are:
- Finding and selecting the right comparable companies.
- Gathering financial information.
- Creating a comprehensive comparison table.
- Calculating comparable rations.
- Using multiples from companies to value the subject company.
Advantages of the Market Approach
The following are the key advantages of adopting a market approach for business valuation:
- The primary evaluation method is based on simple calculations, so all types of businesses and organizations can adopt this approach.
- Public data is used in calculations. This kind of data is real and verifiable, so it enhances the reliability of the entire process.
- Subjective forecasts are not considered in the market approach.
- Subjective estimates or forecasts, if made, can easily be eliminated with the help of comparable information from the industry.
- Finding similar companies and transactions becomes very easy when you are handling a company with lots of competition.
- The latest market pricing is a representation of market conditions, performance assumptions, industry conditions, and shareholder sentiments.
Disadvantages of the Market Approach
- Identification of assets with similar values can be difficult.
- A suitable number of comparable companies or transactions are not available in every situation; hence, using the market approach is not possible all the time.
- The rigidity of the market approach results in limited application and usage.
- In situations where a similar-sized company or transaction is not available, the company might still want to use the market approach for business valuation. It can raise some very serious questions about the quality and quantity of the data.
- Many private companies don’t publicly disclose the details and sizes of their transactions, so finding the relevant information can be challenging, even if you find a direct competitor.
It is evident that a number of things can go wrong with the market approach. Therefore, it is important to rely on professional business valuation services from experts, such as an audit firm in Singapore, to ensure the business is valued correctly.
Two Major Methods of Market Approach
There is a wide range of market approach methods that you can use to value a business. Most of these methods branch out from the following two main methods:
1. Public Company Comparable
As the name suggests, the public company comparable method of the market approach is based on assessing companies that are publicly traded to evaluate the price of a company.
It is not always necessary that competitors or similar-sized companies are trading publicly, so knowing their exact value can be difficult.
In such a situation, experts and auditors are responsible for thoroughly analyzing the value of the public company using suitable selection, application, and adjustment techniques and drawing comparisons with the subject company.
2. Precedent Transactions
The method of precedent transactions is based on the principle that all of the information on similar transactions is readily available. An analyst or audit firm in Singapore can use this information to set suitable prices for the subject company.
This entire process involves dealing with a lot of complicated transactions, including those that relate to mergers and acquisitions.
Therefore, experts have to adopt a comprehensive approach to data analysis and obtain data from both the public and private domains to make sure an accurate estimation of the value is obtained.
Overall, the market value approach is a highly useful method of business valuation that can help your business in many different ways. By engaging the service of a professional audit firm in Singapore, you can make sure that the experts can obtain and analyze data from similar companies to accurately value your business, whether it is a small business or a large one.