The market approach is rooted in the principal of competition. In essence, the valuation analyst attempts to quantify the value of the subject business by comparing it to other similar business. Comparison data may come in the form of public companies (whose valuation is readily known based on stock price), private and proprietary sale data, or other sources. Readers may be familiar with the theory as it is similar to what you might do when pricing a house in a local market.
Strengths of the approach include:
- Easy to understand conceptually
- Readily accepted by buyers in the marketplace
- If comps are accurate can be a highly business valuation accurate methodology
- Oftentimes difficult to find accurate comp data
- Comparing to public companies can be problematic due to the effects of size, liquidity, and marketability of the public company as compared to a private company