Which method involves examining the prices paid for similar companies to value a business?

The method that involves examining the prices paid for similar companies to value a business is known as Precedent Transactions analysis. This approach looks at historical data from past transactions involving comparable companies to establish a benchmark for valuation. By analyzing these transactions, financial analysts can draw correlations between the sale prices and various financial metrics, such as earnings or revenue, to estimate the worth of a business in question.

This basis in market behavior allows analysts to not only gauge what premium buyers are willing to pay but also helps to make informed predictions about how a similar business might be valued in the current market conditions. Precedent Transactions analysis is particularly useful in M&A scenarios, where the valuation needs to reflect what acquirers have previously been willing to invest for comparable companies.

Other methods, such as Discounted Cash Flow analysis, focus on a company’s future cash generation potential rather than historical transaction data, while Asset-based valuation emphasizes the value of a company's physical and intangible assets. Market valuation generally looks at the current trading prices of publicly traded companies, which may not always provide as specific a comparison as the data derived from Precedent Transactions.