- CFA Exams
- 2023 Level II
- Topic 5. Equity Valuation
- Learning Module 27. Private Company Valuation
- Subject 6. Market Approach Methods of Private Company Valuation
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Subject 6. Market Approach Methods of Private Company Valuation PDF Download
The market approach ascertains the value of a private company by performing a comparison between the subject company with similar public companies.
The key assumption is that these comparable public companies do exist. The problem, however, is how to find them and assess their pricing. Analysts should consider the liquidity of equities, size of the firms, company lifecycles, availability of financial data, etc.
Within the market approach three methods are regularly used.
Guideline Public Company Method (GPCM)
It is a method within the market approach whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business, and that are actively traded on a free and open market.
- Identify a group of comparable, public companies. This is based on the assumption of market approach: transactions providing pricing evidence are reasonably comparable to the subject company.
- Derive the relevant pricing multiples of these public companies.
- Make adjustments to the multiples to reflect any differences in risk and growth expectations between the subject company and the guideline public companies.
Adjustments may be necessary to reflect differences in control and marketability between the guideline companies and the subject company.
The control premium comes into play when the objective is to reach a control value result. It is determined by several factors: type of transaction, industry factors, and form of consideration.
Guideline Transactions Method (GTM)
Conceptually this method is similar to the GPCM. It considers market transactions involving the acquisition of the total equity of companies. As such, the pricing multiple more accurately reflects the value of total companies.
As the multiples reflect acquisitions of total equity, they reflect the value of total equity. No control premium adjustment is necessary.
These multiple may need to be adjusted for a number of reasons:
- Synergies. Some transactions may include payments for anticipated synergies.
- Contingent consideration. This also introduces uncertainty.
- Noncash considerations. Stock transactions and cash transactions have different implications.
- Availability of meaningful transactions.
- Changes between transaction date and valuation date.
Prior Transaction Method
This method considers actual transactions in the stock of the subject private company, if such transactions are available and frequent.
Learning Outcome Statementscalculate the value of a private company based on market approach methods and describe advantages and disadvantages of each method;
CFA® 2023 Level II Curriculum, Volume 4, Module 27
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