The Market Approach analyses market transactions involving interests in similar companies to gauge the value of the subject firm. With the advent of private transaction databases such as, Pratts Stats (now Deal Stats), BIZCOMPS, and IBA, the market approach is easier to apply and at times preferred. Revenue Ruling 59-60 specifies: “the best approach to value a security interest is by observing the sales of the same stock as of or near the valuation date. In the absence of arms-length transactions of the subject company’s stock, then sales of comparable stocks should be considered. Accordingly, when performing valuations for tax purposes, i.e., gift or estate tax, the valuation professional must consider the Market Approach in his/her valuation report.”

Several useful statistical measures can aid the valuation analysis of the market data. An understanding of these statistics can help answer questions about the accuracy of the data, the disparity of the data and what observations could be made regarding the data selected. The following statistics are used in when evaluating market transaction data in business valuation:

Arithmetic mean

Median

Mode

Harmonic mean

Standard deviation

Coefficient of variation

Discussion Matter:

Given that valuation multiples are typically used to provide an estimate of value, discuss and demonstrate the application of these statistics in the market approach/method.