Comparable companies multiples method (‘CCM’) and comparable transactions multiples method (‘CTM’) are used extensively while valuing companies using the market approach. Under both the methods value is determined by comparing the asset/company being valued with its peers engaged in similar business with similar regulatory environment, risks, size and geographies. Valuers exercise necessary judgement to provide for differences in the companies/ assets being valued in relation to their peers.

Now let’s understand both CCM and CTM:

Comparable companies method (‘CCM’):

Under the CCM method valuation multiples of publicly traded entities are derived and applied to the company being valued.

The choice of multiples is made based on the sector in which the company operates and the judgement of the valuer. 

Some of the commonly used valuation multiples used in the industry are:

• Enterprise value (‘EV’)/Revenue
• EV/Earnings before interest, tax depreciation and amortization (‘EBITDA’)
• Price equity ratio
• Price/book value

Its rare to find 2 companies that are completely similar. Therefore, necessary adjustments are made to the derived multiples on account of the identified dissimilarities with the comparable companies.

Comparable transaction method (‘CTM’):
With this method of valuing a company, the transactions that have taken place in the industry which are similar to the transaction under consideration are taken into account. Similar transactions are identified and the valuation multiples implied by their purchase prices are used and applied to the company being valued. 

Challenges involved in using the CTM method are absence of data of private transactions. Adjustments similar to those mentioned in the CCM method are made to value the company being valued.

The usage of either CCM and CTM depends on the purpose of valuation.

Organizations are required to assess their market value from registered valuers or valuation professionals for various regulatory and internal decision-making purposes. Being registered valuers and having performed numerous valuations, our endeavour at Acumen M&A Advisors is to assist organisations in determining market value of their businesses in order to take the right decisions.