Valuation: The Market Approach

Chapter 9

Using the Market Approach for Reconciliation

The attentive reader has by now realized that it can be quite a challenging task to estimate the value of a company using only value multiples. Many assumptions need to be made, and to find the absolute level of adjustments required in terms of the relationship value driver(s) and risk differences between the valuation subject and its peers in order to uncover the true and fair value of the subject company is challenging. It may consequently be advantageous to use the market approach alongside the discounted cash flow (DCF) approach.

The purpose of using the DCF approach in conjunction with the market approach is not, however, to calculate two diverse values based on two diverse methods and then to apply a straight or weighted average. Instead, the aim is to minimize the risk of miscalculations and misjudgments in terms of the underlying assumptions and computations. Once again, bear in mind that the two approaches represent “two sides of the same coin.” Should you, under a well-defined valuation purpose, estimate the value of a given company using both the market approach and the DCF approach and arrive at two fundamentally different values, you have either made a mistake in the market approach or, alternatively, in the DCF approach (or, in the worst case, you have made a mistake in both).

It may therefore be easier as well as safer to use the market approach for reconciliation rather than direct value derivation. In this ...