Market value approach for business valuation

Determine the market value of your company easily and simply by

• Find comparable companies in terms of industry and size and look at their sales prices
• Use comparative metrics such as the revenue-to-profit ratio
• apply these metrics to your own company to determine the market value.

This approach is popular because of its directness and use of market data and is often used in corporate sales, financial reporting and legal valuation issues. The selection of relevant comparable companies and the interpretation of market data are crucial for the accuracy of the valuation.

Two different approaches to the market value method

Comparable Companies Analysis (CCA) is a procedure that is based on valuation through comparison with listed companies. Financial key figures and industry multiples such as the price-earnings ratio or enterprise value in relation to EBITDA are used to derive the value of a company. The challenge lies in selecting truly comparable companies and correctly adjusting their metrics to compensate for differences in business models, growth rates and market positioning.

Comparable Transactions Analysis (CTA) analyzes recent sales of similar companies to determine a realistic market value. This method reflects what buyers are willing to pay under current market conditions and takes into account premiums for control or synergies. The difficulty with CTA lies in the availability and comparability of transaction data , as not all sales details are publicly available and transactions often have industry-specific characteristics.

Valuation multiples in the market value method

Valuation multiples are a central element of the market approach and play a crucial role in company valuation. They enable companies to be compared based on standardized value metrics.

EBITDA multiple

• Explanation : Measures the value of a company relative to its earnings before interest, taxes, depreciation, and amortization.
• Advantages : Provides information about operational performance without the influence of capital structure.
• Disadvantages : May be biased in capital-intensive business models that require large investments.
• Frequency of Use : Common, especially in industries where depreciation and amortization have a significant impact on financial performance.

EBIT multiple

• Explanation : Represents the company value in relation to operating profit before interest and taxes.
• Pros : Focuses on operating profitability and is useful for comparing companies with different depreciation policies.
• Disadvantages : Not suitable for companies with high levels of debt as interest expenses are not taken into account.
• Frequency of Use : Often used, especially when companies’ depreciation strategies are not comparable.

SDE multiple

• Explanation : Stands for Seller’s Discretionary Earnings and measures the value of a company in relation to the income available to the owner.
• Benefits : Takes into account income that goes directly to the owner and is therefore relevant for personally managed SMEs.
• Cons : Can be subjective and depends on the owner’s spending structure.
• Frequency of Use : Very common in smaller and owner-managed businesses where the owner’s personal decisions affect profits.

P/E multiple (price-earnings ratio)

• Explanation : Measures a company’s stock price relative to its earnings per share.
• Pros : Simple and intuitive, reflects market profit expectations.
• Disadvantages : Less meaningful for companies that do not make profits or whose profits fluctuate widely.
• Frequency of use : Widely used in listed companies and also applicable to SMEs with stable profits.

sales multiple

• Explanation : Compares company value to sales and is often used when evaluating companies that are not yet turning a profit.
• Pros : Useful when evaluating growth companies that are not yet profitable.
• Disadvantages : Does not take into account the cost structure and profitability of the company.
• Frequency of use : Particularly common in young, fast-growing industries or start-ups.

Book value multiple

• Explanation : Relates the company value to the book value of equity.
• Advantages : Based on objective, balance sheet values, simple calculation.
• Cons : Does not always reflect true market value or future earnings potential.
• Frequency of Use : Mainly used in asset-intensive industries or in valuation for liquidation purposes.

In practice, the preferred multiples vary depending on the industry, market situation and company life cycle. For SMEs, the availability of comparative data must also be taken into account. Selecting the right multiple is crucial to achieving a realistic and market-driven valuation.

Market data and the evaluation of SMEs

Market data poses a particular challenge for small and medium-sized companies (SMEs), which are rarely listed on stock exchanges. Comparable Companies Analysis (CCA) requires a careful selection of similar companies, often limited by different business sizes and market conditions. Comparable Transactions Analysis (CTA) may be more relevant as it looks at actual sales cases that could reflect SME-specific market conditions. However, access to such data is often restricted.

NIMBO is a leading transaction multiples platform for SMEs in various countries. We publish current multiples for different countries, company sizes and industries every month .

Comparable Companies Analysis (CCA)

Step by step procedure:

1. Selection of peer companies : Identify a group of companies that have similar business models, comparable size and similar markets as the SME being evaluated.
2. Data collection : Collect financial data from these companies, including revenue, EBITDA and net income.
3. Calculating multiples : Calculate valuation multiples such as P/E, EV/EBITDA, or EV/sales for each peer company.
4. Make adjustments : Adjust multiples to account for differences in growth, risk and capital structure (see chapter below).
5. Application of the multipliers : Apply the adjusted multipliers to the corresponding financial indicators of the SME being evaluated.

Comparable Transactions Analysis (CTA)

1. Selection of relevant transactions : Find (on the Internet) recently completed sales transactions of companies similar to the SME to be valued.
2. Analyzing Transaction Details : Examine the terms of each transaction to understand relevant details such as purchase price and financials.
3. Calculating Transaction Multipliers : Determine the multipliers from these transactions, such as purchase price to sales or purchase price to EBITDA.
4. Adjustment for specific circumstances : Take into account specific factors of the transactions that are not applicable to the SME being valued.
5. Application to the SME : Use the adjusted transaction multipliers to estimate the value of the SME.

NIMBO offers an online company value calculator , which is based on the CTA method and takes current market data and special features into account.

Enterprise value vs. Equity value as part of the market value method

When valuing companies using the market approach, the distinction between enterprise value (EV) and equity value is of central importance. Both concepts reflect different aspects of company value and play an important role in interpreting valuation multiples.

Enterprise Value (EV)

The EV measures the total value of the company, including debt and minus liquid assets. It represents the value of all demands on the company – both equity and debt investors. In the context of the market approach, EV is often used in conjunction with EBITDA or EBIT multiples to assess operating profitability regardless of the financing structure.

Advantages : Provides a holistic assessment as it includes all sources of capital.

Disadvantages : Can be more complicated to calculate, especially when non-essential assets or liabilities need to be taken into account.

Equity Value (enterprise value)

The equity value is the value that the owners of the company, i.e. the shareholders, are entitled to. It is calculated by subtracting the net financial debt (debt less liquid assets) from the EV. When using multiples such as the price-earnings ratio (P/E) or the book value multiple, the calculated value refers to the equity value.

Advantages : Directly relevant to shareholders as it represents the value of their shares.

Disadvantages : Can be misleading for companies with high debt or significant liquid assets.

When applying the market approach to SMEs, it is essential to understand whether the calculated value relates to EV or equity value in order to draw the correct conclusions. This is particularly relevant when it comes to purchase price negotiations or financing decisions, where the demands of various stakeholders must be taken into account. The correct application and interpretation of these values allows evaluators to deliver accurate and relevant assessments for SMEs.

Example of applying EBITDA multiple to enterprise value and equity value

In order to calculate both Enterprise Value (EV) and Equity Value for an SME valued based on an EBITDA multiple, we need additional information about the company’s capital structure, particularly the level of liabilities and liquid assets Medium. Here is an example scenario:

In this example, the enterprise value of the company would be 15 million, while the equity value, i.e. the value to which the owners are entitled, is 13.5 million. The difference represents the company’s net financial debt.

Adjustments and valuation corrections in the market value method

When applying the market value method to SMEs, adjustments are often required to take into account the specific characteristics of the individual company and to determine an accurate value. Here are the key elements of the adjustments:

• Size adjustments : SMBs can have different risk profiles and growth prospects compared to larger companies. Adjustments to size premiums or discounts are necessary to account for these differences.
• Market-Specific Adjustments : Local and regional markets may differ significantly from the conditions under which comparable companies were valued. Adjustments for geographic and market-specific factors are therefore often necessary.
• Non-Essential Assets : SMEs sometimes hold assets that do not directly contribute to the company’s profitability. The value of these assets must be determined separately and deducted or added to the operating goodwill.
• Non-recurring items : One-off income or expenses that are not recurring must be identified and eliminated from the valuation to obtain an accurate picture of the sustainable earnings situation.
• Synergy and control premiums : Valuation in acquisitions must consider potential synergies or the premiums for gaining control that can increase value beyond pure market value.
• Warehouse : Read our blog post on handling the warehouse .

The adjustments mentioned are crucial in order to take the specific characteristics of SMEs into account in the valuation and to ensure that the value determined is as accurate as possible. The ability to make informed adjustments is a key aspect of valuation competency in the market value process.

Advantages and limitations of the market value method

The market approach can be an effective valuation method for SMEs if used carefully and with its limitations in mind.

For an overview of the most important valuation methods for business valuation.