Market Approach Method

Katherine RomeroApril 12, 2024

Market approach method

This method considers that the value of an asset can be best determined by examining the prices at which comparable assets are being bought and sold in the market. Essentially, it seeks to establish the value of an asset based on what the market is willing to pay for similar assets.

Is an approach used in business and asset valuation that involves comparing the object under valuation with recent transactions of similar assets in the market.

Process for calculating the value of technology

Identification of comparable technologies:

Selection of multiples:

Application of multiples:

Data collection:

Data adjustment:

• Adjust the data from comparable transactions to make them comparable to the technology you're evaluating.
• This may involve adjustments for differences in size, age, geographic scope, intellectual property, among other relevant factors.

Gather information on recent transactions of these comparable technologies, including the sale price, technology features, and market conditions at the time of the transaction.

• Choose appropriate valuation multiples based on the comparison of technologies.
• Common multiples include revenue multiple, earnings multiple, and user multiple.

Apply the selected multiples to the relevant financial metrics of the technology you're valuing using the formula:

Identify similar or comparable technologies that have been recently sold in the market.

Technology value

Relevant financial metric of the technology

Valuation multiple

Where:

• The "Valuation multiple" is the average value of the financial metric (e.g., annual revenue) for comparable technologies.
• The "Relevant financial metric of the technology" is the specific financial metric of the technology you're valuing.

Note: This is a general approach, and it's important to consider the specifics of the market and the technology when performing this calculation.

Demonstrating uniqueness and potential: Companies can increase their value by demonstrating that their innovation is unique and has growth potential similar to that of comparable technologies valued at high multiples.

Improving competitive position: Successful innovation can enhance a company's competitive position in its industry, which in turn can influence its value in the market. This can be achieved through product differentiation, creating entry barriers for competitors, or increasing market share.

How can companies create value from their innovation?

Obtaining higher valuations: By conducting successful transactions involving the innovation, such as licensing deals or strategic partnerships, companies can influence the valuation of their technology in the market.