Valuation: The Market Approach

Chapter 1

Corporate Valuation

In essence, there are three generally accepted methods of valuation: the discounted cash flow approach, the market approach, and the net asset approach. This book deals with the market approach. However, a common misconception is that these three concepts represent three fundamentally disparate or independent methodologies that, applied to the same subject of interest by the same analyst under the same valuation purpose, should or may generate three fundamentally different outcomes. This is not the case. Carried out correctly, a business valuation (under an assumption of continued pursuit of activities, i.e. under a going concern assumption), given a single well-defined subject and valuation purpose, shall in theory as well as in practice produce exactly the same output (i.e. value) irrespective of the model(s) utilized. To put it another way, company value is driven by company fundamentals, not by the choice of valuation model(s).

From a strictly theoretical perspective, the value of a company (or any other cash flow generating asset for that matter) will equal its projected future returns discounted to a present value by a risk-adjusted rate of return. This relationship will hold regardless of the methodology or methodologies used to derive that value. Hence the three methodologies presented above express exactly the same thing, but in three totally different ways. In order to fully appreciate the concept and structure of the market approach it is ...