Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER FIFTEEN
The Market Approach Using
Public Company Data

MARY B. McCARTER KATHRYN F. ASCHWALD

The market approach using public company data is a market-based approach, whereby we estimate the price that would be paid for the common stock of a closely held company, if its common stock were traded in an active market or over an exchange. We do this by analyzing the market ratios of stocks of publicly traded companies that operate in the same industry as the company we are appraising (the subject company), because these companies have the most similar risk profiles and growth prospects to the subject company. To the extent that the risk factors and growth prospects of an investment in the subject company's common stock are different from those of the similar publicly traded company group, the appraiser will make subjective adjustments to the market ratios to reflect these differences. This will be discussed in more detail later.

Revenue Ruling 59-60 specifically states that of the eight factors that “Are fundamental and require careful analysis in each case” for gift and estate tax valuations, is “the market price of stocks of corporations engaged in the same or similar line of business having their stocks actively traded on a free and open market, either on an exchange or over the counter.“1 The valuation guidelines of Revenue Ruling 59-60 were also embraced by the Department of Labor (DOL) in the proposed valuation guidelines it issued governing ESOP valuations.2 In addition, this approach is widely recognized and commonly used in valuing closely held companies. Therefore, the business appraiser needs to consider the public company market approach in all

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