Understanding the Market Approach to Valuation

When business owners begin exploring a potential sale, one of the most common questions is: what is my business worth? The truth is, there are several recognised methods for valuing a business, but one of the most widely used is the market approach.

This method looks beyond spreadsheets and forecasts to focus on what similar businesses have actually sold for in the open market. In many ways, it mirrors how property is valued – by examining recent, comparable transactions.

What is the market approach?

The market approach estimates value based on evidence from recent transactions of comparable businesses. In simple terms: it reflects the price that buyers are currently willing to pay for a business of similar size, sector, and performance.

Key steps include:

• Identifying comparable companies or transactions

• Adjusting for differences (size, geography, customer mix, profitability, etc.)

• Applying multiples (such as EBITDA, turnover, or profit multiples) from these comparables to the business in question

Why business owners should pay attention

• Real-world evidence: Unlike purely theoretical models, this approach is grounded in actual market activity.

• Highlights buyer sentiment: The multiples achieved in the market reflect demand, appetite, and confidence levels among acquirers.

• Competitive tension: In a live sale, well-prepared businesses often achieve higher multiples than the baseline suggested by market data.

Limitations to be aware of

While powerful, the market approach is not perfect:

• Data can be limited, especially for smaller private companies where deals are often confidential.

• No two businesses are truly identical, so adjustments and judgement are always required.

• Market sentiment can change quickly, impacting deal multiples in certain sectors.

Why a professional valuation matters

Relying solely on a ‘rule of thumb’ multiple or hearsay can be dangerous. A professional valuation considers the market approach alongside other methods, such as the income approach (future earnings) and the asset-based approach (net assets).This balanced perspective provides a realistic, defensible view of value.

Next steps

If you’re starting to think about a potential sale or succession, understanding how the market will view your business is essential. A valuation is not just a number—it’s a foundation for planning your future and negotiating from a position of strength.

To discuss a valuation for your business, speak to our team today.