What is the Market Approach to valuation?
The Market Approach is based on the principle of substitution, meaning that for any investment an investor considers, there exist other investments with similar characteristics that are acceptable substitutes. Prudent investors will not pay more for something than they would pay for an equally desirable substitute. Since the objective of an appraisal assignment is to arrive at an opinion of market value, it is logical to examine values determined and tested in the marketplace. Two common methods within the market approach are: a) Guideline Public Company Method; and b) Direct Market Data Method. Some people consider “Rules of thumb” (a.k.a. the Industry Method) a third appraisal method within the market approach. However there are several disadvantages to using a rule of thumb and it should never be relied on by itself for the valuation of an appraisal subject. We use rules of thumb, when available, only as a sanity check on other valuation methods and our conclusion of value.
The Market Approach is based on the principle of substitution, meaning that for any investment an investor considers, there exist other investments with similar characteristics that are acceptable substitutes. Prudent investors will not pay more for something than they can pay for an equally desirable substitute. Since the objective of an appraisal assignment is usually to arrive at an opinion of market value, it is logical to examine values determined and tested in the marketplace. Two common methods within the market approach are: a) Guideline Public Company Method; and b) Direct Market Data Method. Some people consider “Rules of thumb” a third market approach method, however there are several disadvantages to this and it should never be relied on by itself for the valuation. Rules of thumb, when available, can be useful as a sanity check on valuation results.
