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The market approach has three primary methods to derive a value estimate. They are the (1) guideline
public company method, (2) guideline M&A fn 2 transaction method, and (3) subject company transac-
tion method.

1. Guideline public company method. This method measures the value of a businesses and business
interests through development of multiples based on stock trades involving noncontrolling inter-
ests of publicly traded companies that operate in the same or similar industries as the subject
company. In addition, consideration should be given to the financial condition and operating per-
formance of the guideline public companies relative to the financial condition and operating per-
formance of the subject company. The subject company and the guideline public companies are
likely subject to corresponding economic, environmental, and political or regulatory factors and
are considered reasonable investment alternatives.

2. Guideline M&A transaction method. This method is similar to the guideline public company
method but uses multiples derived from actual sales of M&A transactions involving asset pur-
chases or controlling interests of private and publicly traded companies. Accordingly, the guide-
line M&A transaction method will typically produce a controlling marketable level of value
when the selected guideline transactions involve controlling interests, and a minority marketable
level of value when the selected comparable transactions involve minority interests. Any specific
sales terms should also be considered when determining the comparability of the transactions to
the subject company, as well as the need for any valuation adjustments.

3. Subject company transaction method. When prior arm’s-length transactions involving the subject
company’s stock exist, the valuation analyst generally reviews the circumstances surrounding the
transactions to determine whether the prices paid offer meaningful indications of value. Transac-
tions involving the subject company’s stock can be the most probative indications of value avail-
able when the transactions are relatively current and the conditions of sale are consistent with an
arm’s-length transaction, although valuation analysts are cautioned that recent transactions in-
volving distressed equity may reflect the value associated with the option effectively held by
shareholders on a firm’s assets. Such option value may exceed the company’s equity value. As
with guideline M&A transactions, the level of value indicated by the sale and the comparability
of the transaction should be based on the size of the block transacted and the terms of the sale.
For companies with complex capital structures, this method may require an analysis of the value
implied by a transaction involving one or more classes of securities within the capital structure.
This analysis may require the use of a backsolve method in order to appropriately allocate the
value across all of the securities in the capital structure. An in-depth discussion of the backsolve
method can be found in the AICPA Accounting and Valuation Guide Valuation of Privately-
Held-Company Equity Securities Issued as Compensation.

Guideline Public Company Method

This method is used to determine value by first performing a comprehensive search for comparable pub-
lic (guideline) companies. Next, the subject company’s financial statements are analyzed and normal-
ized. Potential guideline companies are analyzed in detail to determine which multiples, if any, might be
applied to the subject company. After selection, if needed, the multiples may be adjusted for differences

fn 2 M&A is an acronym for mergers and acquisitions.

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