CHAPTER 6

MARKET APPROACH
VALUATION

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Department of Accountancy – MGT7A-Financial Management

 LEARNING OUTCOME

• Enumerate the methods under the market

approach
• Illustrate the market value approach.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
 LEARNING CONTENTS
• Empirical/Statistical Approach
• Comparable Company Analysis
• Heuristic pricing rules method

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
MARKET VALUE APPROACH
• The market approach offers the view of business market
value that is both easy to grasp and straightforward to
apply. The idea is to compare your business to similar
businesses that have actually sold.
• If the comparison is relevant, analysts can gain valuable
insights about the kind of price the business would fetch in
the marketplace.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
MARKET VALUE APPROACH
• Analysts can use the market-based business valuation
methods to get a quick sanity check of the pricing estimate
or use this as a compelling market evidence of the likely
business selling price.
• All business valuation methods under the market approach
fall within one or more of the following categories. It is
either based on statistics/empirical or heuristics or
combination of these methods.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
EMPIRICAL / STATISTICAL APPROACH
• Empirical or Statistical approach generally uses research
and database processing in order to come up with
conclusion and recommendation.
• The approach requires references and evidences to
support the determination and evaluation. Information
may take the form of Sales Data, Financial Performance
and other historical information.
• Trend analysis and benchmarking maybe used to process
the information. Tools are also made available to facilitate
processing large information.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
• This is an empirical approach. This is formerly known as
comparative transaction method. Other literature called
this as guideline transaction method or comparative
business sales data.
• This method involves finding out prior transactions (i.e.
mergers and acquisitions, divestiture, etc.) of comparable
companies.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
• Such as transaction might represent either a minority
perspective or a majority perspective.
• Transactions data can be obtained by finding out the exact
industry of the business under consideration using the
established industry classification methods and searching
valuation databases for historical valuation evidence.
• A number of publications collect and disseminate
information on transactions.
• Most publications make their databases accessible on the
Internet for free on a per-use basis or annual subscription
access.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
Among the most widely used are:
• Institute of Business Appraisers (IBA)
• BIZCOMPS®
• Pratt’s Stats TM

• Done Deal TM

• Mid Market Comps (ValueSource)

TM

• Mergerstat®

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
• An ideal guideline transaction would be the one from a
very similar company in the same industry.
• If no direct comparison is available, other data might be
used after considering their market, products, etc.
• Transactions data required adjustment for the transaction-
specific factors such as non-compete agreement,
employment contracts, etc.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
• In selecting which method to employ in a valuation
assignment, the definition of value, the size of the company
being valued and the magnitude of the valuation stake
(majority vs minority) are important.
• A majority stake in a large well-established should be valued
relative to either (a) a prior transaction of the same company
involving a majority stake or (b) guideline transactions
representing a majority stake involving a comparable company.
• A minority stake should be valued using the guideline public
company method after applying proper discounts and
adjustments.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARATIVE PRIVATE COMPANY SALES DATA
• Advantage of this approach
a. source data is reliable and
b. comparable data includes sales of small businesses that
can be similar the small business being valued.
• Limitation of this approach is
➢there is insufficient market evidence in some industries,
➢it will require careful data selection, analysis and
consistent data reporting standards.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
GUIDELINE PUBLIC COMPANY DATA
The guideline public company method involves identifying a
comparable company and obtaining the stock price for the
company’s listed securities. Publicly listed companies (PCLs)
are required to file their financial statement electronically
with the Securities and Exchange Commission (SEC). These
filing are public information and are available on the SEC
website at https://www.sec.gov.ph. Information are also
available in Philippine Stock Exchange website at
https://pse.com.ph

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
GUIDELINE PUBLIC COMPANY DATA
In most cases, the stock prices as obtained from a public
market represent a minority stake. The advantage of this
method lies in the availability of a large set of recent data.
However, it might not be very appropriate in valuing early-
stage and/or small businesses. In using public company data
to value private companies, proper adjustments must be
made to the benchmarks being used on account of size,
growth potential, capital structure, business life cycle (i.e.
early stage or maturity), etc.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
GUIDELINE PUBLIC COMPANY DATA
The advantage of this approach is that there are plenty of
transaction data available from the public capital markets.
Business sale data reporting is generally consistent and
reliable and business financial reporting data are readily
available. Although it can be noted that the limitation of this
approach is that comparison to small businesses may not be
as relevant, the data generally involves sales of non-
controlling business ownership interest (not the entire
company) and data requires adjustment for lack of
marketability of private company ownership interest.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
PRIOR TRANSACTIONS METHOD
The prior transaction method involves looking up historical
transactions in securities of the business under valuation.
The valuation might be for minority stake such as a historical
stock quote from a listed stock exchange or it might be for a
majority stake such a merger and acquisition transaction
involving the business. Additional considerations in selecting
prior transactions as a benchmark include the timeline of
the transaction, the economic situation at the time of the
transaction, etc.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
PRIOR TRANSACTIONS METHOD
The advantage of this approach is that it is already a good
reference for valuation, if the data is available. Since this is
reliant heavily on the data, absence of a good data may not
enable this approach to produce reliable results.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
In Financial Management, financial ratios are used as tools
to assess and analyze business results. Recall that one of
these purposes can be used to determine the value. These
financial ratios are P/E Ratio, Book to Market Ratio, Dividend
Yield Per Share and EBITDA Multiple. Ratios or multiples are
useful tools for doing comparative company analysis. The
advantage of having ratios and multiples is that it creates
better and relevant comparison knowing that opportunities
or investments have distinct drivers of their performance.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Comparable company analysis is a technique that uses
relevant drivers for growth and performance that can be
used as proxy to set a reasonable estimate for the value of
an asset or investment prospective.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
In determining the value using comparable company
analysis, the following factors must be considered:
• Comparators must be at least with the similar operations
or in the similar industry
• Total or absolute values should not be compared
• Variables used in determining the ratios must be the same
• Period of observation must be comparable
• Non quantitative factors must also be considered

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Price – Earnings Ratio
Price – earnings ratio (P/E) Ratio represents that
relationship of the market value per share and the earnings
per share. It sends the signal on how much the market
perceives the value of the company as compared to what it
actually earns. P/E Ratio is computed using the formula:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
P/E Ratio =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Price – Earnings Ratio
To illustrate, Chandelier Co. is a listed company with the
market value per share of Php12.0 and reported earnings
per share of Php4.0.
Using the equation, the P/E ratio is 3. This means that the
Chandelier Company can create 3x the value of what it
earns.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Price – Earnings Ratio
P/E Ratio is also known as P/E Multiples or Price Multiples. To
determine the value of a company using P/E ratio, management
accountants and analysts use P/E of the comparable company.
For instance, Jopet Hotels and Leisure is a hospitality company.
Based on the income statement of the company, it reported
earnings of Php7.00 per share. Based on the listed companies
under hospitality industry, the average P/E ratios is 4.25.
With the foregoing information, you can expect that the value of
Jopet Hotels and Leisure is Php29.75 per share [Php29.75 =
Php7.00x4.25]

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Book-to-Market Ratio
Book-to-Market ratio is used to determine the appreciation
of the market to the value of the company as compared to
the value it reported under its Statement of Financial
Position. It may be recalled that the book values of the
company are based on historical costs and does not purely
incorporate the value in the market now. However, that only
limitation of this ratio is that certain value incorporate do
not represent the true value of the company. Hence, further
due diligence is imperative.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Book-to-Market Ratio
Book-to-Market ratio is computed using this equation:
𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Book to Market Ratio =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Book Value per share can be derived by dividing the net
book value to the number of outstanding shares available to
common or ordinary. Net book value is the difference of the
total assets and the total liabilities. This represents the claim
of the equity stockholders to the company.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Book-to-Market Ratio
To illustrate, Chandelier Co. reported a Book Value per share
of Php35 and with a market value per share of Php12.50.
The Book-to-Market ratio is 2.80 which is computed as
follows:
35.0
Book to Market Ratio =
12.50
Book to Market Ratio = 2.80
This means that for every Php35 per share that is owned by
a stockholder it is 2.8x larger than its value in the market.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Book-to-Market Ratio
If Book-to-Market approach is used for comparable company
analysis, the key component of the financial statement
needed is the Statement of Financial Position. To illustrate,
Jopet Hotels and Leisure reported a book value per share of
P16.50 and the hospitality industry average Book-to-Market
is 0.5, then the value of Jopet Hotels and Leisure can be
estimated around P33 per share [ P33 = P16.50/0.5].

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Dividend-Yield Ratio
Dividend Yield Ratio describes the relationship between the
dividends received per share and the appreciation of the
market on the price of the company. Dividend-Yield Ratio is
also known as dividend multiple. Next to Price Earnings
Multiple, this is also a popular tool because it provides the
investors with the value which they can actually get from the
company.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Dividend-Yield Ratio
Dividend Yield Ratio (DYR) is computed using this equation
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Dividend Yield Ratio =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Dividend-Yield Ratio
To illustrate, Chandelier Co. declared and paid dividends of
Php1.50 per share and their market value per share is
Php12.50. Based in the foregoing, the dividend yield ratio is
0.12 computed as follows:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
DYR =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑃ℎ𝑝1.50
DYR =
𝑃ℎ𝑝12.50
DYR = 0.12
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
Dividend-Yield Ratio
This means that for every Php1.50 dividends they pay it will
translate into 12% of the market value of the equity. Using
this as a tool for comparable company analysis, DYR will
work as a multiplier to the dividends per share declared by
the company.
Suppose that Jopet Hotels and Leisure declared Php1.5 per
share and the average dividend multiple of the similar
industry is 0.047.
The market value per share can be estimated to be around
Php31.91 per share [Php31.91 = Php1.50 / 0.047]
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
EBITDA Multiple
EBITDA or Earnings Before Interest, Taxes, Depreciation and
Amortization represents for the net amount of revenue after
deducting operating expenses and before deducting
financial fixed costs, taxes and non-cash expenses. Given the
components, EBITDA can serve as a proxy of cash flows from
operating activities before tax. Traditionally, cash flows from
operating activities is computed by collections less payments
for operating expenses. Indirectly, EBITDA can be computed
from net income plus depreciation and amortization and
incorporating working capital adjustments.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
EBITDA Multiple
EBITDA Multiple is determined by this equation
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
EBITDA Multiple =
𝐸𝐵𝐼𝑇𝐷𝐴 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
EBITDA Multiple
EBITDA per share is derived by dividing EBITDA by outstanding
share for common equity or ordinary shares. To illustrate,
Chandelier Co. reported EBITDA per share of Php6 and the
market value per share being Php12.0. Given the equation the
EBITDA Multiple is 2 [2 = Php12.0 / Php6.0]
This means that the value of the firm to the market if 2x for
every peso of EBITDA earned. In practice, others adjusted the
EBITDA to incorporate costs relative to other quantified risks.
This is done by adding more costs or recognizing contingent
expenses to generate a more conservative EBITDA results which
will serve as driver for the value of the market.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
EBITDA Multiple
To illustrate, Jopet Hotels and Leisure reported an EBITDA
multiple of Php8.50 per share. The average EBITDA multiple
of the hospitality industry is 3.5. Given the foregoing,
the value of the equity is about Php29.75 [Php29.75 =
Php8.50 x 3.5].

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
EBITDA Multiple
To illustrate further, it also assumed that will have to procure
insurance and security costs to protect the plant assets of
the company. This is about Php0.50 per share. Given this
additional information on the foregoing, the value of equity
is Php28.0 [Php28.0 = (Php8.50 – Php0.50) x 3.5]. You may
note that the value of the firm decreased by Php1.75
[Php1.75 = Php29.75 – Php28.0] after the risk management
cost incorporated.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
In summary, comparable company analysis uses tools to
enable the comparison between companies given the
differences in 3s – Strategy, Structure, and Size. The
objective is to enable the analyst or management
accountant to determine the value of the company based on
the behavior of similar businesses in the industry that more
or less captured the risks factors and other micro and
macro-economic considerations.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
COMPARABLE COMPANY ANALYSIS
In the given illustration we can compare the results generated
using comparable company analysis under various tools
discussed:

EBITDA Multiple Dividend Multiple Book-to-Market

P/E Ratio

We can say that after using various comparative tools the price
of Jopet Hotels and Leisure is between Php29.75 to Php33.00,
subject to due diligence
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
HEURISTIC PRICING RULES METHOD
Another method may consult and use the expert opinion of
professional practitioners which uses Heuristic pricing rules
method. In this method, analysts use business pricing
formulas that are developed based on the expert opinion of
professionals involved in business sales. The best-known
professional group that does this is the business
intermediaries that broker business sale transactions in
specific industries. Their knowledge of the marketplace and
direct exposure to transactions puts these experts in an
excellent position to estimate the likely business selling
price.
Department of Accountancy – ELEC2 –Valuation Concepts and Methods
Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
HEURISTIC PRICING RULES METHOD
The advantage of this approach is that pricing multiples
based on the expert opinion of active market participants is
made available. Also, pricing formulas are often relied upon
both by practitioners and their client business owners and
buyers when pricing a deal.
However, since these are based on expert’s opinion, pricing
multiples may not be sufficiently backed up by rigorous
statistical analysis. There will also be a concern on
availability of information for non-brokered business deals.

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
 THANK YOU
STAY SAFE

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Department of Accountancy – ELEC2