When the two are put together, this delivers value for the health services manager. 6. The market multiple approach to business valuation begins with the firm's net income. This approach is typically used to value firms that are not publicly traded, because publicly traded firms already have the value determined by the market. The underlying philosophy of the market multiple approach is that the firm can be valued by comparing it to a firm whose value is known.

Thus, the second step in this approach is to determine an adequate comparable firm. The comparable firm should be in the same industry and should have roughly the same market share and other characteristics. The more similar the comparable firm is to the firm being valued, the better the valuation will be. Once a comparable firm is chosen, the valuation of that firm is determined in the form of the price/earnings ratio. The P/E ratio reflects...

The net income of the firm being valued is multiplied by the P/E ratio, and this gives an appropriate valuation for the firm being valued. It is possible during this process to make changes to the valuation of the comparable firm. These changes would reasonably capture the differences between the firms. If one firm is larger and older, for example, the multiple might need to be adjusted to account for the fact that the other firm is smaller and younger. Whatever the adjustments might be, they should be based on the differences between the two firms. The market multiple valuation technique can also be used with more than one comparable firm, with a…