As we previously discussed, business valuation is a very important thing to do whenever a company wants to take a major step like a merger, sale, or anything in between. And we also discussed that there are several approaches to valuation. There’s the asset-based approach and the income-based approach! And today, we’re gonna talk about the third approach, which is the market based valuation. So, let’s dive in and find out what it’s all about, shall we?
What Is the Market Based Valuation Approach?
Obviously, with the market based valuation approach, the market is a big player here. You see, experts use market prices and metrics to calculate a company’s worth. This usually happens by comparing the company to similar ones on the market using different metrics and ratios. Naturally, you have to make some adjustments to make sure that the number you will come up with is as accurate as it can be. There are several methods that you can use in this approach, and we’re gonna check them out now!
Market Based Approach Methods
Company Comparables (CCA)
Company comparables, or comparable company analysis, is exactly what the name entails. It involves comparing the company in question to similar companies. This method includes the use of different metrics and ratios like price to earnings or price to book. Usually, this method is used when market prices aren’t available for companies.
Precedent Transactions Analysis (PTA)
The PTA method looks at past deals for companies in the same industry. In other words, it assessed the value of a company by the value of other companies that went through past acquisition deals. So, technically, it gives information about the value of similar companies during mergers or acquisitions.
Market Capitalization
Last but definitely not least, we have the market capitalization method. This is the simplest and most straightforward method on our list of market based valuation methods. Basically, it calculates a company’s value by multiplying the company’s current stock price by its number of shares. The number you get there is the total market value of that company! See, simple.
Wanna Avoid All the Calculations? We Have the Solution
We know, numbers, calculations, estimates, and valuation is not a walk in the park. So why go through all that hassle when you can hand over the work to an outside source? At Noraal, you will gain the peace of mind by knowing that experts will be handling all of your business’s finances from A to Z! Whether it’s the market based valuation or any other type of valuation, all the way to auditing and accounting, we got you. So, make sure you check out what Noraal has to offer, and you won’t have to ever look back. Good luck!