Market approach method

Jose Sebastian Quiroz R. 212032-146 April 2024

Market approach method

It is used to compare in the industry, assets, products, or similar services, to determine the most probable selling value of a product or target asset being evaluated.

Determining the value of a business is necessary in the following situations

Business purchase

01

When you want to establish the asking price or selling price for a business purchase.

Value justification

02

When you want to justify the value of your business in the event of a dispute such as a purchase or disagreements among partners..

Legal justification

03

03

01

02

When you need to defend the valuation of your business to tax authorities or in a legal dispute.

How can companies create value from their innovation?

They can do so by creating unique high-value products, setting a precedent for other similar products, devising new strategies to assess their value and features without losing their significance in the market. Value can also be created through their target audience, segmenting the market, or by creating techniques to acquire information reliably and be able to compare with other products of similar characteristics.

The most commonly used valuation technique in these cases is the market multiples method, which compares the company being valued with other similar companies that are publicly traded or have been recently sold. This method uses relative financial or business metrics selected from the company's information. These metrics can includ e EBITDA, stock prices, sales, or the number of users or subscribers.

Enterprise Value = Chosen Metric x Market Multiple

The success of this method depends on selecting appropriate comparable companies and interpreting the market multiples used correctly. Additionally, it's essential to consider other factors and conduct a thorough analysis to obtain an accurate valuation.