2.08 Valuation methodology – market method
The principle behind the market method for business valuation is that actual transactions for comparable businesses provide a suitable guide for valuing a business. The main drawback to the method is that it may be difficult to find records of transactions involving truly comparable businesses. Its use depends in part on the purpose of the report.
The market method is best suited to “cookie cutter” businesses or as a reasonableness test on a valuation conclusion found via another method.
A simplified example of the market method (using a very limited sample size) is as follows:
Another, usually more suitable use for the market method is as a reasonableness check on business value found using other methods (e.g. the capitalized cashflow method). This may be possible if there are sufficient comparable businesses in the reported sample. This is the most common way MVI uses this method.
Contact MVI regarding the purpose of your valuation. For pre-sales advice a market method may be sufficient, particularly for “cookie cutter” businesses.