Cover Page



Half Title page

Title page

Copyright page



Chapter 1: Corporate Valuation

1.1 The Discounted Cash Flow Approach

1.2 The Market Approach

1.3 The Net Asset Approach

Chapter 2: What Value?

2.1 Standard of Values

2.2 Marketability and Control

Chapter 3: Exchange-traded Shares vs. Transactions

3.1 Exchange-Traded Shares

3.2 Transactions

Chapter 4: How to Put the Peer Group Together

4.1 The Selection Process

4.2 How Many Comparables?

4.3 Analyzing the History

Chapter 5: Market Value of Equity vs. Market Value of Operating/Invested Capital

5.1 Market Value of Equity

5.2 Market Value of Operating/Invested Capital

Chapter 6: The Value Multiples

6.1 EV Multiples

6.2 P Multiples

6.3 Other Details to Consider

Chapter 7: The Value Drivers

7.1 Primary Value Drivers of the EV Multiples

7.2 Primary Value Drivers of the P Multiples

7.3 Assumptions Regarding Value Drivers

Chapter 8: Applying the Market Approach in Practice

8.1 The Case Study

8.2 Risk

8.3 Summary of Calculated Values

Chapter 9: Using the Market Approach for Reconciliation

9.1 The Discounted Cash Flow Value of Engineering Corp

Chapter 10: Forward-looking Value Multiples

Chapter 11: Summary and Concluding Remarks

Chapter 12: Epilog

Appendix: Brief Derivation of the Respective Value Multiple’s Individual Value Drivers



The Market Approach

For other titles in the Wiley Finance Series
please see

Title Page


Acknowledgments are due to:

My colleague Rickard Wilhelmsson, who has been an invaluable source of help since the inception of this book. Rickard has not only reviewed the manuscript many times, but has also been my constant source for testing the book’s reasoning, logic and structure throughout the process. Our discussions on how to handle various valuation issues over the years we have worked together, not only in the context of this book, have contributed immensely to the emergence of this text.

I’m also deeply indebted to all my other PwC colleagues, both in my own office as well as abroad, who over the years have contributed with both vivid discussions and great insights that have had a great impact on me.

I would moreover like to extend thanks to Tomas Sörensson at KTH Royal Institute of Technology in Stockholm. Tomas’ comments on the manuscript have brought great value. Additionally, I would like to thank Tomas for persuading me to teach at KTH. Tomas was keen to respond to the students’ continuous requests to supplement the teachings of the DCF with an in-depth attention and review of the market approach. The great interest and dedication shown by the students for this topic over the years has influenced me greatly.

I’d also like to thank the outstanding team at Wiley. Werner Coetzee, my acquisition editor, was always accessible and the consummate professional. He never wavered in his support for my vision, and provided strong leadership throughout the process. To Jennie Kitchin, Carly Hounsome, Lori Laker, Wendy Alexander and the rest of the team at John Wiley & Sons, who have done an outstanding job to shepherd the book through its production process. Also, Richard Walshe (of Prufrock) and Tom Fryer (of Sparks Publishing Services) for working wonders with the text and the structure of the book. I owe you all great thanks.


The market approach is in practice, i.e. in the “real world,” by far the most widespread valuation methodology. In spite of this, the methodology has been and continues to be more or less neglected in the present body of literature. The reason that the methodology is, from a literary perspective, overlooked by academics as well as practitioners is most likely because it is generally considered, in relation to the very well-considered discounted cash flow methodology, to be a bit too simple.

The fact that the methodology is generally considered, compared with the discounted cash flow methodology, as simple should also be the reason for its popularity. Who among us has not taken the average or median value multiple, e.g. the average or median P/E or P/S ratio, from a peer group of listed companies, applied it to the relevant base metric of the valuation subject in question and taken the result to be its market value of equity? Moreover, it is not uncommon in different contexts to be told that a certain type of company, or a certain kind of business enterprise, in a given industry should be valued at, say, ten times its operating earnings (EV/EBIT 10x), 1.5 times its book value of equity (P/BV 1.5x), $0.5 million per consultant, etc. We can illustrate this problem further using the following created example:

XYZ Corporate Finance has estimated the fair market value of 100 percent of the common shares, i.e. the fair market value of equity, in the retail company ABC Corp. In order to minimize the risk of erroneous conclusions due to extreme values and other types of “anomalies,” we have used a variety of generally accepted valuation methods and models. Based on these methods and models we assess the fair market value of 100 percent of the shares in ABC Corp at $507 million. The results of our analysis are summarized in Figure I.1.

Figure I.1 Calculated shareholder values (i.e. market value of equity) – ABC Corp

So what is the problem? Does this valuation not appear to be straightforward as well as thorough? The problem is that the fair market value of ABC Corp is likely to be more or less anything but $507 million. Certainly, the market approach can at first glance be perceived as simple. However, as we shall see later in this book, unfortunately it is deceptively simple. The rest of this book will, in one form or another, take apart the XYZ valuation of ABC Corp piece by piece.

The chief purpose of this book is that of practice, i.e. to provide a hands-on tool for valuation using the market approach. Notwithstanding this, the value of that taught practice is rendered useless if not accompanied by a substantiated, clear-cut explanation or rationalization (giving you as a reader enough information to let you make up your own mind about the subject matter(s) at hand). Arbitrary adjustments and statements like “that’s just theory, this is how you do it in real life” will not fly either in this book or in real life (just try that in a negotiation or in a court of law!). Hence, if you cannot explain exactly how and why you have reached your conclusion (that is, if your reasoning and conclusions are neither transparent nor commonsensical), the value of such conclusion(s) is zero. To put it in even simpler terms: if I don’t understand it, I won’t buy it. Consequently, although the purpose of this book is not theory, no adjustment and no conclusion will be allowed without the support of thorough theoretical and commonsensical reasoning.

Chapters 1–2 provide an introduction and overview of business valuation methodologies, standards of value and the issue of marketability and control. Chapters 3–4 deal with the peer group composition. Chapter 5 addresses the relationship between enterprise value and equity value. The relationship is straightforward yet very important in order to appreciate the subsequent chapters. Chapters 6–7 provide a description of some common value multiples and their accompanying value drivers. In Chapters 8–10 we use a case study to follow the valuation of a fictitious engineering company, Engineering Corp. These chapters are at the heart of the matter and summarize in a concrete and practical manner the technical and theoretical review that we carry out in Chapters 1–7.

I suggest that the reader first reads this book from cover to cover in order to get an overview of the individual parts as well as their relationship to each other, and then goes back to those sections in which they wish to immerse themselves.

I would also like to draw it to the reader’s attention that financial terms and ratios are not in any way protected by design rights. Hence there are myriad different concepts and definitions describing basically the exact same variables and parameters. Consequently, terms and key ratios of the same name may represent different things to different players. For that reason, I will try my utmost to define exactly what I mean when I build or refer to a specific term or ratio.

Chapter 1

Corporate Valuation

In essence, there are three generally accepted methods of valuation: the discounted cash flow approach, the market approach, and the net asset approach. This book deals with the market approach. However, a common misconception is that these three concepts represent three fundamentally disparate or independent methodologies that, applied to the same subject of interest by the same analyst under the same valuation purpose, should or may generate three fundamentally different outcomes. This is not the case. Carried out correctly, a business valuation (under an assumption of continued pursuit of activities, i.e. under a going concern assumption), given a single well-defined subject and valuation purpose, shall in theory as well as in practice produce exactly the same output (i.e. value) irrespective of the model(s) utilized. To put it another way, company value is driven by company fundamentals, not by the choice of valuation model(s).

From a strictly theoretical perspective, the value of a company (or any other cash flow generating asset for that matter) will equal its projected future returns discounted to a present value by a risk-adjusted rate of return. This relationship will hold regardless of the methodology or methodologies used to derive that value. Hence the three methodologies presented above express exactly the same thing, but in three totally different ways. In order to fully appreciate the concept and structure of the market approach it is vital to recognize the fundamentals of the other two methodologies in isolation as well as in conjunction with each other. Set out below is a brief introduction to these three methodologies.


The discounted cash flow approach (DCF) aims to establish the net present value of a cash flow generating asset (e.g. a company) by discounting its future expected returns with an appropriate required rate of return.

Performing business valuations, the cash flow which forms the basis of the net present value calculation is usually the “free cash flow to firm” (FCFF), explicitly the expected cash flow of the business independent of its financing (i.e. cash flow accruing to the company’s shareholders and lenders). Consequently, the cash flow in question should not be affected by such things as interest or dividends; however, it will be burdened by tax. Hence, the discount rate must reflect a weighted cost of capital for debt and equity financing after tax. A discounting (i.e. a net present value calculation) of the expected cash flow at the appropriate weighted average cost of capital will give the value of the business enterprise (i.e. the market value of operating capital or, alternatively, the market value of invested capital).

To obtain the value of the shares, i.e. the value of the equity, the business enterprise value needs to be adjusted by the net debt position at the valuation date, i.e. subtracting financial liabilities, and including excess cash and non-operating assets.

It is also possible to compute the equity value, i.e. the market value of all shares, via a direct approach, that is, by projecting future cash flow specifically attributable to the shareholders of the company, free cash flow to equity (FCFE). Such cash flow has already been charged with financial items (interest and suchlike) and should accordingly be discounted by a matching rate of return (specifically a required return on equity). Hence, discounting this cash flow at the appropriate capital cost of equity therefore gives the equity value directly.


The market approach aims to derive the value of a company based on how similar firms are priced on the stock exchange or through company transactions.

Using the market approach, price-related indicators such as price in relation to sales, earnings, number of employees, etc. are utilized. Consequently, the pricing of the valuation subject will implicitly be dependent upon other actors’ assessment of future growth potential, profitability, risk profile (cost of capital), etc. for the valuation subject in question, which may or may not be appropriate.

The task is therefore to find comparables with as similar a structure and operations as possible to the company in question. Differences between the comparator group of companies and the valuation subject at issue as regards the size and nature of their operations, among other things, will justify correspondingly different levels of business risk, growth potential, margins, etc. These differences must therefore be considered when justifying different levels of value, i.e. when justifying the relevant or appropriate value multiple to be applied to the subject company.


The net asset approach implies an adjustment of the balance sheet with regard to the market value of assets and liabilities. The net asset approach is often cited as an independent valuation method, but given an assumption of ongoing business operations, i.e. a going concern assumption, a proper implementation will, in order to properly capture the value of the subject company’s intangible assets, and synergies among assets, normally require the use of several DCF calculations. Consequently, fully executed, the concluding value derived from the net asset approach under a going concern assumption will, to the dollar, match that derived by the DCF approach.

Often a simplified form of the net asset approach, where only book tangible and intangible assets and liabilities are adjusted to their market value equivalents, is applied. The net asset value thus calculated can then be used as a basis for comparison and reconciliation of the DCF value. The difference between the simplified net asset value above and the DCF value may then be deemed to represent the value of non-book intangible assets including goodwill.

Chapter 2

What Value?

A common misconception is that, in the world of business valuation, only one single universal value exists. Unfortunately that is not the case. There is a whole variety of different types of values available as well as definitions of value. For this reason, before even working on any spreadsheets, it is very important to clearly define what value we are looking for and why.


As indicated above, there is a vast number of generally accepted standards of value. The most common when working with unlisted companies are:

Fair value and fair market value may, in a broad context, be categorized under the umbrella term “market value.”

The market value aims to define or describe the subject interest from a “neutral” value perspective; in other words, the value shall reflect a well-informed financial investor’s point of view. This implies a value equivalent to a transfer of the shares, or the business enterprise entity should that be the case, in an open and unregulated market between a rational seller and a prudent buyer with no coercion and when both parties have access to equivalent and relevant information. The value remains free from any type of extra or additional synergistic values or premiums (strategy, economies of scale, acquisition of market shares, etc.) which are likely to benefit only one, or a certain group of, specific investor(s).

Investment value represents the value for an explicit investor and therefore includes premiums that can be realized by only one, or maybe a small class of, specific investor(s) through various types of synergy. The values of synergies hence make the difference between the estimated market value as defined above and the investment value.

The market approach, based on quotes derived from publicly traded shares, is particularly handy when making use of the fair value or the fair market value standard of value.

On the other hand, should the valuation be based on multiples derived from transactions (listed as well as unlisted companies) rather than publicly traded shares as above, one should be aware that these multiples may include a variety of premiums and discounts of different nature and size (see the “Transactions” section for information on the factors that can give rise to these premiums and discounts).

The actual price paid for acquired companies may thus be based on factors and synergies that only those specific purchasers were able to identify and/or assimilate. Consequently, financial investors, who cannot assimilate these kinds of synergies, cannot pay such premiums either. The value of the subject interest as derived from a transaction-related multiple may thus run the risk of reflecting the value of (i.e. the prevailing conditions for) that particular peer during that particular transaction rather than the more “neutral” market value set by a well-informed financial investor (in other words, the valuation subject will be given the investment value of that particular peer as acquired by that particular purchaser at that specific point in time rather than the market value as defined above).

On the flip side of the coin, value multiples derived from normal stock trading in public companies are accordingly not appropriate for the valuation of synergy-fueled acquisitions. As these investors may be able to realize synergies that financial investors cannot take advantage of, they may also have the opportunity to realize values that a financial investor cannot take advantage of.

Logically, then, should not multiples derived from company transactions be appropriate for value derivation when considering an acquisition or disposal of a majority stake (in which it can be considered to be scope for synergies)? Although multiples derived from transactions often involve the value of synergies, these are unlikely to be identical to that of your specific position/acquisition. Hence caution needs to be exercised when using value multiples derived from company transactions data (more on this later).

Consequently, if one wants a valuation from a specific investor’s point of view (i.e. a valuation including various kinds of synergies), a DCF approach is recommended instead. In this case, the DCF valuation can be tailored to the specific circumstances and conditions of the specific company or acquisition.


We move on to what is, within the framework of valuation, an extraordinarily complex issue that can have a significant impact in terms of value if handled incorrectly:

1. What level of marketability and ownership interest does the equity stake at issue embody? The identical share, in a given company, may hold different values depending on the ownership interest and level of marketability associated with just that particular share.
2. What adjustments are required to recalculate the resultant value, based on its present given ownership interest and marketability, to the level of ownership interest and marketability that one de facto wants it to represent?

2.2.1 Marketability (liquidity)

The value of an individual share, in the form of a minority interest stake, in a given unlisted company (i.e. a non-marketable minority interest) is lower than that of an equivalent single share of a publicly listed company (i.e. a marketable minority interest), all else being equal. This is because a minority stake in an unlisted company may be very difficult to divest – in many cases perhaps even unsaleable – as interest in the share among stakeholders other than the company’s current (often very limited) group of shareholders may be close to non-existent (i.e. there is no public market for the shares in question, and so the individual owner must himself find a buyer and negotiate an appropriate selling price for the share/equity stake in question). Equivalent listed shares can, on the other hand, normally be sold and transformed into cash more or less instantaneously (assuming, of course, that the shares in question trade fairly frequently).

2.2.2 Control

The lower value per share as indicated above applies only to a single share in the form of a non-marketable minority interest (i.e. a minority shareholding in an unlisted company) vis-à-vis an equivalent share in the form of a marketable minority interest (i.e. a minority shareholding in a listed company). The imaginary value of this individual unlisted share, in the form of a non-marketable minority interest, multiplied by the number of outstanding shares, does not, however, give the value of the company if you are that company’s sole proprietor (i.e. if you are sitting on a non-marketable majority interest).

Just as a rational investor is willing to pay more for a stock that is liquid, compared with a corresponding illiquid one, all else being equal, the same rational investor is willing to pay more for a stock that provides control vis-à-vis a corresponding one that does not, all else being equal. The right or option to influence the strategy, management policy, capital structure, salaries, and allowances of senior executives, dividend policy, listing policy, etc. of the company in question in general represents considerable value. This is evident if not in context with buy-out acquisitions where acquirers often pay a significant premium for the right of control.3 It is rare to find premiums being offered for listed minority interests (and should someone do that, it would most likely be a minority interest that, together with the bidder’s other possessions, would give rise to some form of controlling interest). Hence, the value of the one and the same type of share in a given unlisted company is therefore higher if it is part of a larger controlling stake as compared to that exact same share as part of a stake containing only one or a few shares.

In its most basic form there are four different combinations of ownership interest and marketability:

1. a marketable majority interest
2. a marketable minority interest
3. a non-marketable majority interest
4. a non-marketable minority interest.

The connection between these four positions is illustrated in Figure 2.1.

Figure 2.1 Different levels/combinations of ownership and marketability

2.2.3 Adjusting for marketability and control

In addition to a strict classification of each position, in accordance with the description above, it is also important to emphasize that utilization of different valuation methods and models, and different assumptions regarding input data of these methods and models, can result in different characteristics in terms of ownership and marketability. This may in turn cause the exact same share to be assigned different values depending on no more than the choice of valuation methodology and/or input data. An analyst/appraiser under a well-defined assignment must therefore keep track of his or her actions when he or she derives the value of a company based on a mixture of methods and models.

That a 100 percent ownership of a company’s shares represents a majority or a controlling interest, and that a 1 percent ownership of a company’s shares represents a minority interest is, of course, obvious in the same way that an exchange-listed stock is more liquid than an equivalent unlisted one. However, should we face a situation in which adjustments would be considered necessary, i.e. if we are forced to adjust the given value(s) in order to move from a set to a desired position/definition, then how do we go about this and, if action should be necessary or is taken, at what premium/discount size/sizes, and, finally, from what basis of value(s) are we starting?

For example, an individual share in the form of a majority stake in an unlisted company (i.e. a non-marketable majority interest) is not liquid in the same way as an equivalent quoted minority share (i.e. a marketable minority interest), but it is not as illiquid as an individual share in the form of a minority stake in an unlisted company (i.e. a non-marketable minority interest). A majority owner may, of course, on his or her own initiative launch a divestment scheme. This option is usually not available to shareholders of minority interests since the majority holder, as indicated above, holds the privilege to decide upon divestment initiatives, if any. However, if the company in question is not already courted by a vast number of potential buyers, this process will take a minimum of several months to complete. The delineation as to how liquid or illiquid the non-marketable controlling interest really is may thus be discussed (i.e. subject to careful analysis). The interest in question is not as liquid as a stock market share, which can be transformed into cash in a few days, but neither is it as illiquid as an unlisted minority interest, which in turn, in its worst-case scenario, can be virtually unsaleable. The complexity of the appropriate or relevant premiums and discounts due to control and minority issues are analogous.

Normally, the chief difficulty is not to classify the category in which to position the value in question, but which adjustments and how large these need to be in order to transform a given definition of value to a desired one. The area is challenging and can bring about large premiums and discounts from the initially calculated/derived value. The direction and impact will depend upon the valuation methodology and data utilized for the initial value derivation, as well as the magnitude of any rights or restrictions associated with the interest in question (the discounts/premiums may in extreme cases be 50 percent or more in any direction). Furthermore, the size of these prospective premiums and discounts cannot normally be set by precise mathematical accuracy, but is instead subject to individual case-by-case analysis.4

Should the value of the subject interest be derived by way of publicly traded minority shares, typically the result is a marketable minority interest value (or, put another way, a value to which a minority share in the valuation subject would be traded if listed on a public market under going concern), i.e. a valuation in line with the left oval of Figure 2.1. The exchange-traded shares, from which the multiples of the comparables have been derived, do after all represent trading of marketable minority shares.

Figure 2.2 Different levels/combinations of ownership interest and marketability – marketable minority interest vs. non-marketable majority interest

What definition of value can then be assumed if instead of the above-referenced publicly traded minority shares we derive our value based on transactions of whole companies (i.e. the purchase/sale of majority stakes)? Well, this is a far tougher nut to crack. It should at least be fairly uncontroversial to assume that the resultant value should typically represent a controlling interest (although there might be several situations where even this cannot be taken for granted, see below for a more developed argument on the matter).

Notwithstanding the above, what about liquidity? It is usually not possible, over the stock exchange, to trade controlling stakes with the same liquidity as equivalent minority stakes. An at all times fully marketable majority interest will therefore exist only in theory.

However, if we are a little less rigorous and assume that a controlling stake in an unlisted company has changed hands through a structured bid or auction process, then the shareholding might be, if adding a good portion of goodwill, deemed as traded with at least a fragment of liquidity, if not in any way complete. Specifically, if a controlling interest in an unlisted company has changed hands via a structured bid process, some kind of functional liquid market may for that majority interest in question be said to have existed at least for a very short period of time. However, this “market” is by no means, as regards access to buyers and sellers acting on free will, on a par with that of exchange-traded minority shares (i.e. there was, for example, in the above-referred bid process, only one seller).

Moreover, were we to derive the value of a given company on the above basis, i.e. were we to value the subject interest based on multiples derived from the above-mentioned transaction, all else being equal, we must be aware that the resultant value will reflect conditions and circumstances of that specific transaction, i.e. we will transfer those exact premises/conditions of that exact transaction to our valuation subject in question. Specifically, all else being equal, the resultant value will represent a value at a point in time when all of the above-mentioned terms and conditions are present as well as in play. Should we at the valuation date not be in this position, i.e. should our valuation subject at that time not be in the final phase of a structured bid process with several seriously interested bidders in the running, we cannot use or credit the value multiple in question (in this case we would evidently overestimate the value of our company as we have, by using the applied transaction-derived value multiple, provided our valuation subject with features and benefits they cannot be considered to enjoy at this point in time).

We encounter the same kind of difficulty at the other end of this spectrum. Should the transaction in question have been preceded by a coercive situation, i.e. had the seller in question for one reason or another, to only one single buyer, been forced at short notice to divest, the existing transaction could not be considered representative of a marketable interest (note: when referring to “marketable” in this context, I mean as per the above section, not marketable as in regularly traded minority shares). In other words, if one derives the value of a company based on fundamentals of that particular transaction, i.e. on multiples resultant from that particular transaction, the resulting value would not be representative of a marketable interest. Additionally, referring to the aforementioned situation, it might also be relevant to question whether the transaction even reflects value of control, even though a controlling interest was transferred. As the vendor in question could not govern the transaction (i.e. he or she was at a negotiating disadvantage), he or she might thus not even have received payment for value of control.

The same type of reasoning applies to public buy-outs, i.e. when acquiring a controlling interest in a listed company. If such an offer is to stand a chance of success, one generally needs to offer a premium (to the current stock exchange price). Since stock exchange prices usually represent marketable minority interests, the bid premium (if any) would consequently represent (i.e. be embodied in the transaction-derived value multiples) the net value of control (and, possibly, potential synergies and/or streamlining opportunities as well) and the subsequent loss of liquidity (i.e. when unlisted, the shares in question would no longer carry full liquidity).

No matter what position you take (or whatever circumstances prompted the trade), multiples derived from transactions of whole companies must be handled with great care, as owing to control/marketability issues they are often associated with significant uncertainties as an effect of the more often than not undisclosed underlying terms and conditions of the sale. In addition, as indicated above, recognized synergies (e.g. cost efficiencies, a more effective use of sales channels, expansion into new markets, buy-out of competitors, etc.), might have played a noteworthy role when the transaction was priced. These factors fit well under control but have a tangible value that can be regarded as being beyond that normally meant by the term.

Finally, it should also be noted that the purchase price may have been higher or lower than the actual underlying value, depending on the bargaining power of the involved parties. In addition, the purchase price might have been driven by purely personal or emotional reasons. The desire of owner-managers to own or manage a large corporation might be so great that they consciously or unconsciously ignore basic economic relationships (who among us has not been lured into bidding out of pure prestige or devotion?) Such “black box” effects can sometimes be substantial (for further information regarding transaction-derived multiples, see the “Transactions” section below).

Figure 2.3 Different levels/combinations of ownership interest and marketability – synergies and “black box” effects6

Now it may, as a closing point of this chapter, be appropriate to link back to the initial discussion regarding fair value/fair market value vs. investment value. The four ovals above – the marketable majority interest, the marketable minority interest, the non-marketable majority interest, and the non-marketable minority interest – all generally represent/reflect different types of fair value/fair market value positions. Introducing synergies and “black box” effects into the equation would undoubtedly bring a migration to investment value territory. Fair value/fair market value represents/reflects asset value on a stand-alone basis, i.e. the benefits the asset in question can bear on its own, regardless of ownership (however – which is important to point out – different categories/classes of owners), whereas investment value represents/reflects asset value for an explicit unique owner (i.e. including additional gains, in the form of various well-defined synergies, attainable or realizable by only the particular owner in question).

1 For legal purposes, the fair value definition varies from jurisdiction to jurisdiction. In International Financial Reporting Standards (IFRS), fair value is defined as “The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (IFRS 3, Business Combinations, Appendix A, Defined terms).