Valuing Pass-Through Entities

Chapter 10The Market Approach

The market approach is one of three generally accepted approaches to value. Under the market approach, indications of value can be obtained by analyzing transactions of ownership interests of companies in the same or similar lines of business. Like the income approach, it is referenced in IRS Revenue Ruling 59–60, as well as in other valuation standards, such as those of the Appraisal Standards Board and the AICPA. This chapter addresses the underlying theory and authoritative support for the market approach, the process of applying the market approach in connection with determining the value of an ownership interest in a PTE, and the normalization adjustments that need to be considered under the market approach with respect to applying PTE valuation inputs. The market approach considers the price at which transactions occur between buyers and sellers. Accordingly, the market approach is very relevant if the standard of value is fair market value.¹

Revenue Ruling 59–60

Revenue Ruling 59–60, § 4, lists eight factors that “are fundamental and require careful analysis in each case.” Included in this list of factors are two examples of the market approach, specifically (1) prior “sales of the stock and the size of the block of stock to be valued,” and (2) “[t]he market price of the stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the ...