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tially unequal bargaining power between the parties. fn 8 Documented arm’s-length, bona fide offers to
buy or sell may also provide guidance for value determination. The level of disclosure, due diligence,
and negotiation between the parties should be considered when assessing the degree of reliance that may
be afforded to such offers.

In distressed situations, careful consideration of the facts and circumstances surrounding internal trans-
actions is important. One important factor to consider is how broadly the opportunity was marketed to
potential third-party investors to justify arm’s-length pricing. If the opportunity was sufficiently market-
ed by the company or its advisers and if a non-inside party acquired the marketed securities, there may
be good support for the investment being truly indicative of market pricing. However, if the company’s
distressed situation required a rapid process and sufficient marketing was not performed, the investment
may not indicate true market value. Furthermore, valuation analysts are cautioned that recent transac-
tions involving distressed equity may reflect the value associated with the option effectively held by
shareholders on a firm’s assets.

Common Errors in the Market Approach

Listed here are some of the common errors made when using the market approach:

 Failure to adjust multiples in the market approach to the correct level of value or, alternatively, to
reconcile the level of value as part of the overall conclusion of value

— Adjustments should be applied if the indicated value derived from the multiples has dif-
ferent control and marketability characteristics than the subject interest.

 Mismatching market value of capital contained in the numerator with earnings amount contained
in the denominator

— The denominator of common equity multiples should include returns available to com-
mon equity.

— The denominator of invested capital multiples should include returns available to invest-
ed capital (debt and equity holders).

 Mismatching time periods

— Multiples derived from guideline company data for one period should be applied to the
subject company parameter for the same time period.

 Mismatched definitions of variables

— Definitions used to derive multiples for guideline companies should be the same as the
definitions used to calculate the subject company parameter that the multiple is applied
to.

fn 8 For example, see Robert J. Stark, Jack F. Williams, and Anders J. Maxwell, "Market Evidence, Expert Opinion, and the Adjudi-
cated Value of Distressed Businesses," The Business Lawyer 68, no. 4 (2013): 1007–1038.

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