The market based approach to valuing a business is a highly subjective method of valuation. It draws what information it can from the market and applies it to the business.

Use EPS and PE ratios

It’s common to try to use the P/E ratio for the particular business sector the company in question is a part of. You might get this from the FTSE Actuaries Share Indices in the Financial Times. You can then apply that ratio to the metrics of the private company, such as the EPS, to get a rough estimate of the market price of the company’s shares. A formula could be:

Industry P/E *Specific Company EPS = Price per Common Share.

Use Price per User

Subscription based industries, especially High Tech, might estimate how much money each user is paying to the company and use that information to value the company.

Use the Position of the Purchaser

Sometimes the purchaser of a company gains some additional value because of economies of scale, additional sources of revenue, access to new markets, or synergies. In this case the value of the company being purchase is probably higher than it would be if the purchaser was new to the industry.

More:
5 Ways to Value a Private Business

Tags: business valuation, market based approach, market valuation method
Categories: Lesson, Bachelor of Commerce, Entrepreneurship, Business
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