101 Concepts for the Level I Exam

Essential Concept 60: Market Approach Methods for Valuing Private Companies

The three methods used in a market approach are:

Guideline public company method (GPCM):  Value based on multiples of comparable public companies; multiples are adjusted to reflect differences in the relative risk and growth prospects.

The advantage is the availability of a large number of guideline companies with financial and trading information. The disadvantage is that risk and growth adjustments to the pricing multiple are subjective.

Guideline transactions method (GTM):  Value based on pricing multiples derived from the acquisition of control of entire public or private companies that were acquired. Whereas GPCM uses a multiple that could be associated with trades of any size, GTM uses a multiple that specifically relates to sales of entire companies.

The advantage is that it uses data from the acquisition of entire public companies instead of small blocks of stock. The disadvantage is that data may be unreliable if the transactions are not subject to public disclosure.

Prior transaction method (PTM) considers actual transactions in the stock of the subject private company.

The advantage is it is most relevant since it is based on actual transactions on the company’s stock. The disadvantage is that it can be less reliable if the transactions are infrequent