Middle Market M & A, 2nd Edition

CHAPTER 13Market Valuation

This chapter presents a practical approach to valuation as applied to middle market mergers and acquisitions (M&A).^a In this context, market value is the highest value of a business in the marketplace. If an owner thinks their business is worth a certain price, they are generally referring to market value. (There are other value worlds; see Chapter 3 for a refresher.) These valuations determine possible open market selling prices for a business interest.

Every company simultaneously has at least three market values. This explains why market value, like all of business valuation, is a range concept. Each market value level is called a subworld. A subworld represents the most likely selling price based on the investor type. The subworlds are asset, financial, and synergy. The asset subworld reflects what the company is worth if the most likely selling price is based on net asset value. This may be because the most likely buyer bases their purchase on the company's assets, as opposed to its earnings stream—perhaps because the resulting value based on earnings is below the value of its assets; for example, a company's real estate might be worth more than its business operations. The financial subworld reflects what an individual or nonstrategic buyer would pay for the business based on its earnings potential without any significant planned changes in operations. The synergy subworld is the market value of the company when the benefits of combining operations ...