What is a 'Market Approach'

A market approach is a method of determining the appraisal value of an asset, based on the selling price of similar items. The market approach is a business valuation method that can be used to calculate the value of property or as part of the valuation process for a closely held business. Additionally, the market approach can be used to determine the value of a business ownership interest, security, or intangible asset. Regardless of which asset is being valued, the market approach studies recent sales of similar assets, making adjustments for differences in size, quantity or quality.

BREAKING DOWN 'Market Approach'

While it can be relatively simple to value publicly traded companies, based on their stock price at any given moment, less than 1% of all companies in the United States are publicly traded. This presents challenges for those trying to obtain a fair price for an asset or company that is privately held. Two major types of market approaches to valuation are: the Guideline Transaction Method (using prices of similar companies recently sold) and the Guideline Public Company Method (using prices of similar companies publicly traded).

Examples of the Market Approach

In the real estate industry, a property's value can often be estimated by looking at comparables, such as recent property sales, similar in size and features, located in close proximity to the property being valued. With companies, steps investors often take to value private business include sourcing recent transactions (sales, mergers), close in operations, industry, and economic conditions.

An example would be trying to derive the value of a young cybersecurity company. An analyst might scan recent cybersecurity companies that have gone public, noting if the private and newly IPO-ed firm target the same customer base, have similar revenues, and rely on analogous processes for keeping their customers safe.

The Market Approach: Areas of Potential Concern

Areas that investors and analysts should pay close attention to when taking the market approach include sales or revenues figures. Two companies may both be in the healthcare industry; however, if one is a large pharma firm and the other a small-cap biotechnology company, comparing transactions involving them could not be fully relevant. It is also crucial to apply correct pricing multiples during the valuation process. For example, a TTM (trailing twelve months) enterprise value multiple should not be applied when considering a NTM (next twelve months) projection of a company being valued.

RELATED TERMS
  1. Cost Approach

    The cost approach valuation method recommends the price a buyer ...
  2. Modified Book Value

    Modified book value is an asset-based method of determining how ...
  3. Business Valuation

    Business valuation is the process of determining the economic ...
  4. Asset-Based Approach

    Asset-based approach is a type of business valuation that focuses ...
  5. Collateral Value Insurance

    Collateral Value Insurance is a type of business insurance used ...
  6. Appraisal Right

    An appraisal right is the right to determine a fair stock price ...
Related Articles
  1. Investing

    What You Should Know About Real Estate Valuation

    Accurate real estate valuation is important to mortgage lenders, investors, insurers, and buyers and sellers of real property.
  2. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  3. Small Business

    Valuing Startup Ventures

    Valuing a company is a difficult task, regardless of the size of the business - but these methods can help.
  4. Investing

    4 ways to value a real estate property

    Here are several approaches to evaluate real estate properties for investment purposes.
  5. Investing

    How to choose the best stock valuation method

    There are many valuation methods available to investors, each with unique characteristics. Here, we'll explore the most common valuation methods – and when to use them.
  6. Personal Finance

    What Is Your Financial Services Business Worth?

    Understanding how much your practice is worth can help you make decisions about whether or not to sell the practice.
  7. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  8. Managing Wealth

    Rental Properties: Cash Cow Or Money Pit?

    Create a real estate valuation system to forecast the profitability of an income-producing property.
  9. Investing

    6 Tips For Protecting Your Home's Value

    New taxes, property values, appraisals, community changes and nearby abandoned foreclosures can all lower your home's value. Take proactive steps to protect it.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. How is market to market accounting different than historical cost accounting?

    Learn about historical cost accounting and mark to market accounting, along with the difference between and limitations of ... Read Answer >>
  3. Why should an investor understand accounting?

    Learn why an investor should understand business accounting to perform investment and credit analysis. Find out about asset ... Read Answer >>
  4. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
Trading Center