What is a Market Approach to estimating enterprise value?
A Market Approach to estimating enterprise value for the purposes of an ASC 820 valuation report is based on comparing the enterprise to comparable assets in observable markets. Essentially, market approaches use publicly available information about actual transactions or known valuations to inform the valuation of the enterprise in question. These approaches may be used alongside a mix of Asset Approaches and Income Approaches.
The three main Market Approaches are:
- Guideline Public Comparable Companies—compare the enterprise to publicly traded companies and adjust for size, risk, and likelihood of liquidity.
- Guideline Transaction Approach (M&A)—compare the enterprise to a basket of similar businesses that were sold.
- Venture Guideline Financings (also known as the “Backsolve”)—extrapolate from the value of investments in the business to find the total value necessary to justify those investments.