By Dr. Nigokhos Kanaryan, CPA — Managing Partner, Axarion
08/03/2024

This article is based on a presentation delivered at the X National Conference of Valuers in Bulgaria, exploring how the market (comparative) approach is applied in business valuation — from regulation to academic theory and everyday consulting practice. The question behind it is simple: who really applies the approach, and how consistently?
The Law of One Price: The Foundation
The market multiples approach is fast, intuitive, and grounded in the Law of One Price — two identical assets should trade at the same price in an efficient market.
That makes it one of the most practical and widely used valuation tools among investment bankers, consultants, and analysts. Yet, while the logic is straightforward, the implementation differs substantially between regulation, academia, and industry.
The Four Key Steps
In all frameworks, valuation using comparables follows four fundamental steps:
1. Identify comparable companies or transactions.The appraiser decides whether to use equity multiples (P/E, P/B, P/S, P/User) or enterprise multiples (EV/EBITDA, EV/EBIT, EV/S).
2. Select the peers.Similarity must be justified both by industry classification (e.g., GICS) and by fundamental indicators like profitability, growth, and risk.
3. Determine representative multiples.The appraiser calculates the mean, median, or harmonic mean, and may use regression models to link multiples with key value drivers.
4. Apply adjustments.Premiums and discounts are introduced only when substantiated — for example, to reflect control, liquidity, or scale differences.
The Regulatory and Standards Perspective
International and European valuation standards provide a principles-based framework, not a checklist of rules.Both the International Valuation Standards (IVS 2025) and the European Business Valuation Standards (EBVS 2020) outline the conceptual boundaries within which professional judgment operates — they do not prescribe a rigid procedure.
The standards emphasize three core requirements for applying the Market Approach:
1. Comparability — the selected peers must demonstrate qualitative and quantitative similarity to the subject business;
2. Verifiability — data for comparable companies must be reliable and sourced from verifiable, consistent, and auditable information;
3. Arm’s length basis — the observed market prices or transactions should represent exchanges between independent and unrelated parties.
Regarding averaging and aggregation, neither IVS nor EBVS specify a single preferred measure of central tendency.Instead, they call for professional caution in:
• selecting the time periods and data windows used for computing averages, and
• disclosing the rationale behind any averaging or smoothing methods applied to market inputs.
This principles-based design leaves room for professional reasoning — while still demanding transparency, documentation, and defensible logic in every valuation conclusion.
In Bulgaria, Regulation No. 41 of 11 June 2008 of the Financial Supervision Commission (FSC) complements this principles-based structure with rule-oriented safeguards. It recognizes the average of market multiples as a valid benchmark for public tender valuations, provided that data are verifiable, transactions are at arm’s length, and any adjustments are justified and documented.
Academic Research: Structure and Precision
Academic studies have refined the approach by focusing on peer selection and statistical consistency.
Two main methods dominate:
• Industry-based selection, typically using the Global Industry Classification Standard (GICS) with at least five comparables at the two- or three-digit level;
• Fundamentals-based selection, which prioritizes companies with similar profitability, growth, and risk, usually between five and ten peers.
Recent research (e.g., Bernström, 2014; Damodaran, 1995) also highlights the advantages of the harmonic mean in reducing the influence of outliers. Some studies incorporate machine learning to refine peer selection and identify hidden value drivers in large datasets.
Valuation Practice: Pragmatism First
In practice, valuation professionals tend to combine both academic and regulatory perspectives.They use a hybrid peer selection approach — starting from industry classification and refining the sample based on financial fundamentals.
• Investment bankers and equity analysts rely most often on P/E, followed by P/S and Dividend Yield.
• Consultants and private equity professionals prefer EV/EBITDA or EV/EBIT, as these focus on enterprise performance, not just equity returns.
Averaging remains the dominant method. The arithmetic mean is simple but sensitive to outliers, while the median provides robustness. Many firms now apply regression analysis (as recommended by UBS and McKinsey) to detect relationships between multiples and financial metrics, though linear models may oversimplify complex financial realities.
The Data Revolution in Valuation
Over the past decade, the rise of financial data science has transformed how comparables are selected and analyzed.Platforms such as Finbox and Refinitiv offer structured, verified, and harmonized financial data for thousands of listed companies.
While this enhances consistency, it also introduces new challenges: data complexity, heterogeneity, and information overload.Machine learning models can help uncover meaningful patterns — but expert judgment remains irreplaceable in determining which comparables truly make sense.
Final Thought
The market approach seems simple, but its correct application requires discipline, documentation, and discernment.Regulation sets the rules, standards define the principles, and academia provides the analytical tools — but professional expertise bridges them all.