In this final iteration of valuation methodologies, we will be discussing how to value a company based on the market and comparable companies. This valuation technique is the most informal of all discussed in this series but is the most efficient and cost effective. The market comparables method considers the past sales of similar companies as well as the market value of publicly traded firms that have an equivalent business model to the company being valued. To get a more accurate valuation, more than one comparable transaction should be used. This method of valuation can help identify the current value and potential growth for a company.
Comparable transactions look at multiples such as the EV/EBITDA ratio, among others, to determine a value. The difficulty with this approach is the limited availability of financial data regarding past transactions between private companies. A comparable transaction approach is generally used in conjunction with other valuation techniques including the discounted cash flow and other comparable company analysis techniques.