VALUATION CONCEPTS AND METHODS

MARKET-BASED
APPROACH
INTRODUCTION TO MARKET-BASED VALUATIONS

MARKET-BASED VALUATION
Market-based valuation is known as the market value
approach or relative valuation.

It is a widely used method in finance and economics to

determine the value of assets, businesses, and
investments.

This approach relies on comparing the subject asset's

value to similar assets or businesses that have been
recently transacted in the market.
INTRODUCTION TO MARKET-BASED VALUATIONS

MARKET COMPARABLES

Also known as "comps," are recently transacted

assets or businesses in the market that are similar
to the subject asset or business being valued.

These comparables serve as benchmarks for

estimating the value of the subject asset based
on their respective market prices or transaction
data.
INTRODUCTION TO MARKET-BASED VALUATIONS

SOURCES OF COMPARABLE COMPANY

TRANSACTION DATA

PUBLIC PRIVATE PRIOR

COMPANY COMPANY TRANSACTION
TRANSACTIONS TRANSACTIONS OF THE SUBJECT
COMPANY
INTRODUCTION TO MARKET-BASED VALUATIONS

ADVANTAGES

It is user-friendly.
It uses actual data.
It is relatively simple to apply.
It does not rely on explicit forecasts.
INTRODUCTION TO MARKET-BASED VALUATIONS

DISADVANTAGES

Sometimes, no recent comparable company data can be

found.
The standard of value may be unclear.
Most of the important assumptions are hidden.
It is a costly approach.
It is not as flexible or adaptable as other approaches.
The reliability of the transaction data is questionable.
INTRODUCTION TO MARKET-BASED VALUATIONS

CATEGORIES OF MARKET
APPROACH VALUATION METHODS

STATISTICAL/
EMPIRICAL HEURISTICS
APPROACH APPROACH
CATEGORIES OF MARKET APPROACH VALUATION
STATISTICAL/EMPIRICAL APPROACH
Generally uses research and database processing in
order to come up with conclusion and recommendation.
This approach requires references and evidences to
support the determination 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.
STATISTICAL/EMPIRICAL APPROACH METHODS

01 COMPARATIVE PRIVATE COMPANY SALE DATA

02 GUIDELINE PUBLIC COMPANY DATA

03 PRIOR TRANSACTIONS METHOD

STATISTICAL/EMPIRICAL APPROACH METHOD
COMPARATIVE PRIVATE COMPANY SALES DATA
also know as comparative transaction method,
guideline transaction method, or comparative business
sales.
This method involves finding out prior transaction of
private comparable company.
Transaction data can be obtained by finding out the
exact industy of the business under consideration
using the established industy classification methods
amd searching valuation database for historical
valuation evidence.
STATISTICAL/EMPIRICAL APPROACH

PRIVATE COMPANY TRANSACTIONS

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. Among the most widely used are:

a. Institute of Business Appraisers (IBA)

b. BIZCOMPS®
c. Pratt’s Stats™
d. Done Deal™
e. Mid Market Comps™ (ValueSource)
f. Mergerstat®
STATISTICAL/EMPIRICAL APPROACH METHOD
COMPARATIVE PRIVATE COMPANY SALES DATA
ADVANTAGES
• Source data is realiable and comparable data includes
sales of small companies that can be similiar to small
business being valued.
• Availability of good sources of private business sales
data.
LIMITATIONS
• Insufficient market evidence in some industries
• Require careful data selection, analysis, and consistent
data reporting standards.
STATISTICAL/EMPIRICAL APPROACH METHOD
GUIDELINE PUBLIC COMPANY DATA
Involves identifying comparable company and obtaining
the stock price for the company's listed securities.
Publicly Listed Companies are required to file their
Financial Statements electronically with Security
Exchange Commission.
Informations are available on SEC website
https://www.sec.gov.ph. and on Philippine Stock
Exchange https://pse.com.ph.
STATISTICAL/EMPIRICAL APPROACH METHOD
GUIDELINE PUBLIC COMPANY DATA
ADVANTAGES
• Availablity of a large set of recent data
• Business sale data reporting is generally consistent
and reliable
• Business financial reporting data are readily available
LIMITATIONS
•It might not be appropriate in valuing early-stage and/or
small businesses
•Data requires adjustments for lack of marketability
STATISTICAL/EMPIRICAL APPROACH METHOD
PRIOR TRANSACTION METHOD
Involves looking up historical transactions in securities
of the business under valuation.
Additional considerations in selectinh prior
transactions as a benchmark includes the timeline of
the transaction and the economic situation at the time
of the transaction.
STATISTICAL/EMPIRICAL APPROACH METHOD
PRIOR TRANSACTION METHOD
ADVANTAGES AND LIMITATIONS
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 be
enable this approach to produce reliable results
CATEGORIES OF MARKET APPROACH VALUATION
HEURISTIC PRICING RULES METHOD
In this method, analyts 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
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.
COMPARABLE COMPANY ANALYSIS
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.

Relative valuation method that uses financial ratios

and multiples in valuing a business.
COMPARABLE COMPANY ANALYSIS
IN MARKET VALUE APPROACH

01 PRICE / EARNINGS RATIO

02 BOOK - TO - MARKET RATIO

GUIDELINE PUBLIC COMPANY DATA
03 DIVIDEND YIELD RATIO

04 EBITDA MULTIPLE
FACTORS TO CONSIDER IN USING
COMPARABLE COMPANY ANALYSIS
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
STEPS IN USING COMPARABLE COMPANY
ANALYSIS IN VALUATION
1. Find the right comparable companies.
2. Determine the ratio to be used and gather
financial information.
3. Calculate the comparable ratios.
4. Use the average multiples from the
comparable companies to value the
company in question.
COMPARABLE COMPANY ANALYSIS
PRICE - EARNINGS RATIO
P/E ratio is determined by this equation:
Market value per share
P/E RATIO =
Earnings per share
Represents how much investors are willing to pay for
a peso of earnings generated by the company.

Using P/E ratio for valuation:

Value per share = Earnings per share x P/E multiple
COMPARABLE COMPANY ANALYSIS
BOOK TO MARKET RATIO
Use to determine the appreciation of the market to the
value of the company as compared to the value it
reported under its balance sheet.
Book Values of the company are based on historical
costs and does not purely incorporate the value in the
market now.
COMPARABLE COMPANY ANALYSIS
BOOK TO MARKET RATIO
Book to market ratio is determined by this
equation:
Net Book Value Per Share
BTM RATIO =
Market Value Per Share

Using BTM ratio for valuation:

Book value per share
Value per share =
BTM multiple
COMPARABLE COMPANY ANALYSIS
DIVIDEND YIELD RATIO
Dividend Yield Ratio is determined by this equation:
Dividend per share
DIVIDEND YIELD RATIO =
Market value per share
Represents the percentage return an investor can
expect to receive from dividends relative to the
current share price.

Using P/E ratio for valuation:

Dividend per share
Value per share =
Dividend multiple
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
The EBITDA multiple is a financial metric used in business
valuation to assess the value of a company. It measures
the relationship between a company's Enterprise Value
(EV) and its Earnings Before Interest, Taxes, Depreciation,
and Amortization (EBITDA). The EBITDA multiple is also
known as the "EBITDA valuation multiple" or "EBITDA
multiplier."

Enterprise Value = EBITDA x EBITDA Multiple

COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
EBITDA or Earnings Before Interest, Taxes,
Depreciation, and Amortization represents the net
amount of revenue after deducting operating
expenses and before deducting financial costs,
taxes and non-cash expenses.

EBITDA = Net Income + Interest Expense + Taxes + Depreciation +

Amortization

EBITDA = Revenue - COGS - OpEx + Depreciation + Amortization

 COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
EBITDA Multiple is determined by this equation:

Market value per share

EBITDA MULTIPLE =
EBITDA per share

Note: A higher EBITDA multiple indicates that the company is valued more
highly relative to its EBITDA, which may suggest that investors are willing
to pay a premium for the company's earnings. Conversely, a lower EBITDA
multiple may indicate a lower valuation, which could imply that the
company's earnings are not as highly regarded by the market.
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
Sample Problem:
Company X is a publicly traded company in the technology
sector. The company's latest financial report shows the
following information:
EBITDA: $100 million
Number of Shares Outstanding: 50 million
Market Value per Share: $30

Calculate the EBITDA per share and the EBITDA multiple for
Company X.
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
Solution:
To calculate the EBITDA per share, we divide the total EBITDA by the
number of shares outstanding:

EBITDA per Share = EBITDA / Number of Shares Outstanding

EBITDA per Share = $100 million / 50 million
EBITDA per Share = $2

EBITDA Multiple = Market Value per Share / EBITDA per Share

EBITDA Multiple = $30 / $2
EBITDA Multiple = 15x
Interpretation:
The EBITDA multiple of 15x indicates that the market
values Company X at 15 times its EBITDA per share.
Investors are willing to pay $15 for every $1 of
EBITDA per share that the company generates.
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
Sample Problem:
Company Y is a publicly traded company in the consumer goods industry. The
company's income statement for the latest fiscal year is as follows:
Revenue: $200 million
Cost of Goods Sold (COGS): $90 million
Operating Expenses: $60 million
Depreciation & Amortization: $10 million
Interest Expense: $5 million
Tax Expense: $15 million

Additionally, the company has 50 million shares outstanding, and the current
market value per share is $40.
Calculate the EBITDA and EBITDA per share for Company Y. Then, determine
the EBITDA multiple for the company.
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
Solution:
Calculate EBITDA:
EBITDA = Revenue - COGS - Operating Expenses + Depreciation & Amortization
EBITDA = $200 million - $90 million - $60 million + $10 million
EBITDA = $60 million

Calculate EBITDA per Share:

EBITDA per Share = EBITDA / Number of Shares Outstanding
EBITDA per Share = $60 million / 50 million
EBITDA per Share = $1.20

Calculate EBITDA Multiple:

EBITDA Multiple = Market Value per Share / EBITDA per Share
EBITDA Multiple = $40 / $1.20
Interpretation:
EBITDA Multiple = 33.33x The EBITDA multiple of 33.33x indicates that the market values Company Y at
approximately 33.33 times its EBITDA per share. Investors are willing to pay $33.33
for every $1 of EBITDA per share that the company generates.
COMPARABLE COMPANY ANALYSIS
EBITDA MULTIPLE
Sample Problem:
Company XYZ has an EBITDA of $10 million, and the industry
average EBITDA multiple is 8x.

Calculate for enterprise value.

Enterprise Value = EBITDA x EBITDA Multiple

Enterprise Value = $10 million x 8
Enterprise Value = $80 million
THANK
YOU!