Company & Business Valuation

Reasons for Valuation of Companies & Businesses

Company and business valuations are most often used when some one wish to purchase a share of the business entity. The most common reasons for interest are:

  1. Issuance of new company shares to investors
  2. Partial ownership transfers
  3. Business / Share sale
  4. Taxes
  5. Mergers and acquisitions
  6. Ownership dispute resolutions, especially to buy out minority
  7. Management buy-out
  8. Estate planning
  9. Accounting requirements

Why seek Professional Valuation Help?

Valuation is never an exact science. For example, valuations of two food & beverage companies could be vastly different because they could have different growth prospects and future profitability. A loss making business can be more valuable than a similar profitable business if the former has the potential to make much higher profits in the near future. For example, even when Amazon was loss making, its valuation was much higher than many traditional retailers. That’s because the future prospects of Amazon is much brighter than many of its traditional competitors.

Furthermore, for private business entities whose shares are not quoted on the stock market, determining their market values is often not straight forward. For example, a business entity’s balance sheet typically only shows the historical value of its tangible assets. The value of intangible assets are often not shown in financial statements and the value of tangible assets do not reflect their market value. A valuation expert will be able to help you more accurately estimate the market value of private company shares.

A good professional business valuer will be able to help you in the following areas:

  • Business or share sale: You have spent many years effort in getting your business to where it is today. You don’t want to sell it at non-optimal value. We can help you maximize the value you can sell your your business or part of it to others so that your years of effort is fairly rewarded.
  • Invest or Buy a Business: Buying  a business is a complex undertaking and often deciding right price to invest or buy a business is a key decision that you have to make. However, to estimate the value of a business is much more complicated than valuing a real estate property because a business has many more variables and often comparable transactions are lacking. We can help you build valuation models that enable you to study the price you should pay for the business under different scenarios and this could potentially save you substantial sums of money.
  • Disputes: Sometimes there are disputes among shareholders, directors or other parties that result in the need to estimate the fair value of a business or the values of the shares owned by certain shareholders. Under such circumstances, a professional valuer may be appointed by both sides or one side. When all disputing parties appoint the valuer, the valuer’s duty is to all parties and he has to be independent. Hence, our job in this case is to gather inputs from all parties and make independent judgments. In some circumstances, we could be appointed by one side and in this case, our role may be to help this party further his case.
  • Regulatory Requirements: At times, accounting standard requirements, tax authorities or the court requires independent valuation report to be produced. In such circumstances, we can help you estimate the fair value of your business in a professional and cost effective manner.

Valuation Approaches for Companies and Businesses

Next, we will explore the different approaches to valuation of companies and businesses.

There are generally 3 approaches to value a business.

  1. Income approach
  2. Market approach
  3. Asset-based approach

Income Approach

The income approach is often used to value a business that is profitable or will be profitable in the foreseeable future.

Income can be represented with free cash flows or net income.

Market Approach

Using the market approach, one would try to find comparable public listed companies or comparable transactions. For example, real estate is often valued using the market approach because of the ease of obtaining large number of comparable transactions.

However, one must be careful when applying market approach as the business or asset being valued is often different from the comparables. Hence, adjustments should be applied to determine a more accurate value.

Asset-based Approach

Assets-based approach is most often used to value a business that is not expected to be profitable in the near future or its breakup value is greater than if it remains as it is.

The tricky part here is that valuation of intangible assets such as brand name, intellectual properties, customer relationships, workforce etc.

Fair value,  market value or investment value

The standards of value is often overlooked but it should be one of the first things that a valuer should establish prior to performing any valuation.

Fair value is often used in minority oppression and accounting purposes because it represents what is fair to the stakeholders rather than what the asset is likely to fetch in the market.

Market value on the other hand represents the value of an asset given willing buyer and willing seller scenario in an arms length transaction. In minority oppression cases, the seller is typically an unwilling seller. Hence, market value is usually not used.

Investment value considers synergistic value that a potential buyer may benefit from a purchase. Therefore, investment value might be higher than market value.

Premiums and Discounts

Control premium or lack of control discounts are often applied after the initial value of a company is established. Furthermore, for privately held companies or even non-liquid publicly traded shares, lack of marketability or liquidity discount may have to be applied.

However, applying premiums and discounts is a complicated subject and care should be taken in its application.

Contact Info

To receive expert company and business valuation advice, please feel free to contact Henry Ong at ong@rocvalue.com or 6681-6713. We can help you answer your questions.