Chapter 6 MARKET APPROACH VALUATIONVALUATION CONCEPTS AND METHODOLOGIES MARKET VALUE APPROACH Market Value Approach follows the concept that the value of the business can be determined by reference to reasonably comparable guideline companies for which transaction values are known. The values may be known because these companies are publicly traded or because they were recently sold, and the terms of the transaction were disclosed. The business valuation methods under the market approach that are typically used in professional business appraisals include comparative transaction method/comparative private company sale data method, guideline publicly traded company method and use of expert opinions of professional practitioners. Market-based business valuation methods are routinely used by business owners, buyers and their professional advisors to determine the business worth. This is especially so when a business sale transaction is planned. After all, if you plan to buy or sell your business, it is a good idea to check what the market thinks about the selling price of similar businesses. The market approach offers the view of business market value that is both easy to grasp and straightforward to apply. The idea is to compare your business to similar businesses that have actually sold. If the comparison is relevant, analysts can gain valuable insights about the kind of price the business would fetch in the marketplace. Analysts can use the market-based business valuation methods to get a quick sanity check of the pricing estimate or use this as a compelling market evidence of the likely business selling price. All business valuation methods under the market approach fall within one or more of the following categories. It is either based on statistics/empirical or heuristics or combination of these methods. Empirical / Statistical Approach Empirical or Statistical approach generally uses research and database processing in order to come up with conclusion and recommendation. The approach requires references and evidences to support the determination and evaluation. Information may take the form of Sales Data, Financial Performance and other historical benchmarking maybe used to process available to facilitate processing large i information. Trend analysis and information. Tools are also made formation.VAL Wiel \CEPTS AND METHODOLOGIES approach is that there is insufficient market evidence in some industries, and it will require careful data selection, analysis and consistent data reporting standards. Guideline Public Company Data The guideline public company method involves identifying a comparable company and obtaining the stock price for the company’s listed securities. Publicly listed companies (PLCs) are required to file their financial statement electronically with the Securities and Exchange Commission (SEC). These filing are public information and are available on the SEC website at https-/Awww.sec.gov.ph Information are also available in Philippine Stock Exchange website at https://ose.com.ph In most cases, the stock prices as obtained from a public market represent a minority stake. The advantage of this method lies in the availability of a large set of recent data. However, it might not be very appropriate in valuing early-stage and/or small businesses. In using public company data to value private companies, proper adjustments must be made to the benchmarks being used on account of size, growth potential, capital structure, business life cycle (ie. early stage ‘or maturity), etc. The advantage of this approach is that there are plenty of transaction data available from the public capital markets. Business sale data reporting is generally consistent and reliable and business financial reporting data are readily available. Although it can be noted that the limitation of this approach is that comparison to small businesses may not be as relevant, the data generally involves sales of non-controlling business ownership interest (not the entire company) and data requires adjustment for lack of marketability of private company ownership interest. Prior Transactions Method The prior transaction method involves looking up _ historical transactions in securities of the business undervaluation. The valuation might be for minority stake such a historical stock quote from a listed stock exchange or it might be for a majority stake such a merger and acquisition transact ing the business. Additional considerations in selecting prior transactions as a benchmark include the timeline of the transa: the economic situation at the time of the transaction, etc.VALUATION CONCEPTS AND METHODOLOGIES The advantage of this approach is that it is already a good reference for valuation, if the data is available. Since this is reliant heavily on the data, absence of a good data may not enable this approach to produce reliable results. Comparable Company Analysis in Financial Management, financial ratios are used as tools to assess ar analyze business results. Recall that one of these purposes can be used determine the value. These financial ratios are P/E Ratio, Book to Market Ratio, Dividend Yield Per Share and EBITDA Multiple. Ratios or multiples ere useful tools for doing comparative company analysis. The advantage having ratios and multiples is that it creates better and relevant comparison knowing that opportunities or investments have distinct drivers of thee performance. Comparable company analysis is a technique that uses relevant drivers for growth and performance that can be used as proxy to set a reasonable estimate for the value of an asset or investment prospective. In determining the value using comparable company analysis, the follow factors must be considered: * Comparators must be at least with the similar operations or in the similar industry * Total or absolute values should not be compared * Variables used in determining the ratios must be the same ¢ Period of observation must be comparable « Non quantitative factors must also be considered Price — Earnings Ratio Price - earings ratio (P/E) Ratio represents the relationship of *= market value per share and the eamings per share. It sends the on how much the market perceives the value of the company compared to what it actually eams. P/E Ratio is computed using formula: Market Value Per Share F Ratio = Beene Earnings Per Share To illustrate, Chandelier Co. is a listed company with the market value per share of Php12.0 and reported earnings per share of Ph; [Sk CeGeren rary neces Using the equation, the P/E ratio is 3. This means that the Chandelier Company can create 3x the value of what it earns. P/E Ratio is also known as P/E Multiples or Price Multiples. To determine the value of a company using P/E ratio, management accountants and analysts use P/E of the comparable company. For instance, Jopet Hotels and Leisure is a hospitality company. Based on the income statement of the company, it reported earnings of Php7.00 per share. Based on the listed companies under hospitality industry, the average P/E ratio is 4.25. With the foregoing information, you can expect that the value of Jopet Hotels and Leisure is Php29.75 per share [Php29.75 = Php7.00 x 4.25]. Book-to-Market Ratio Book-to-Market ratio is used to determine the appreciation of the market to the value of the company as compared to the value it reported under its Statement of Financial Position. It may be recalled that the book values of the company are based on historical costs and does not purely incorporate the value in the market now. However, the only limitation of this ratio is that certain values incorporated do not represent the true value of the company. Hence, further due diligence is imperative. Book-to-Market ratio is computed using this equation: Net Book Value Per Share » ip ee ee Book to Market Ratio Market Value Per Share Book Value per share can be derived by dividing the net book value to the number of outstanding shares available to common or ordinary. Net book value is the difference of the total assets and the total liabilities. This represents the claim of the equity stockholders to the company. To illustrate, Chandelier Co. reported a Book Value per share of Php35 and with a market value per share of Php12.50. The Book-to- Market ratio is 2.80 which is computed as follows: 35.0 Book to Market Ratio = 12.50