What have comparable businesses actually sold for, or what do comparable listed companies trade at?
The market approach values a business by reference to what comparable businesses have sold for or what comparable listed companies trade at. The guideline transaction method uses actual sales of private businesses and is usually the more persuasive for small and mid-sized businesses where good data exists.
Multiples drawn from actual sales of private businesses of similar size and type. Often the most persuasive evidence for small and mid-sized businesses, provided the comparable set is narrowed properly by industry, deal date, performance and operational characteristics.
Multiples from listed companies in the same or a similar industry, adjusted heavily for size, liquidity and growth. Useful as a ceiling and a sanity check for a small private company. It rarely leads, because a listed comparable is larger, liquid and diversified.
The funnel narrows in order: industry, then deal date and the market conditions at the time, then historical performance including growth and margins, then operational characteristics such as size, customer type, geography and owner dependence. Three well-chosen comparables beat thirty loose ones, and the valuer documents why the chosen point in the range fits the subject business.
Brokers' rules of thumb, such as two times gross fees or one times revenue, are a cross-check and never a method. They ignore profitability and risk, which are the two drivers that vary most between businesses in the same industry, so they value a high-margin business and a marginal one identically.
Industries with active, observable sale markets: hospitality, licensed venues, retail and ecommerce, childcare, pharmacies, real estate rent rolls, fitness and allied health.
A defensible valuation considers all three approaches, applies the ones that fit, and explains why the others were given little or no weight. A detailed report sets that reconciliation out in full.