The Market Approach: Pre-, During and Post-Pandemic (Part II)
The Michel-Shaked Group’s Israel Shaked and Paul Dionne published Part II of a two-part article in the October 2023 issue of the American Bankruptcy Institute Journal which discussed what has changed, if anything, in the field of corporate valuation as a result of the pandemic. Specifically, this article focused on the market approach and how it may have been changed across the pre-pandemic, pandemic and post-pandemic time periods.
The market approach is typically, but not exclusively, based on valuation benchmarks/metrics of companies similar to the subject company and consists of two methodologies: the comparable company (CompCo) methodology and the comparable transaction (CompM&A) methodology. When applying the CompCo methodology to value a business, the valuation professional determines comparable peer companies with similarities to the valuation target, and then applies the observed multiples of the peers to relevant financial metrics of the target company. When performing the CompM&A methodology, comparable recent transactions are observed to determine valuation multiples to apply to the subject company. The multiples can be historical (i.e. latest-twelve month) or forward-looking depending on the case specifics.
The article discusses how the selection process of peer companies or target transactions and the selection and application of operating multiples has changed across the pre-pandemic, pandemic, and post-pandemic time periods. Using their recent experience in the Chesapeake Energy bankruptcy, Israel and Paul provide a case study on how the application of the market approach was impacted by the economic shock of the pandemic.
A full version of this article can be seen here.