Business Valuation is a process to estimate the fair value of a company’s business, including its assets and liabilities, where a Business Valuation specialist takes consideration of a wide range of factors ranging from macroeconomic conditions to industry environment, from the business model of a company to its financial performance.
Business Valuation plays a key role in strategic planning and business decision-making in various contexts such as pre-IPO financing and group restructuring. The company’s management, with the aid of Business Valuation, will be able to obtain a reliable quantitative assessment in relation to the company’s worth and business potential. There are numerous needs and requirements the company needs to take into account across different stages of company development.
The Needs of Business Valuation
Along the road of a company being a start-up to a publicly listed company, Business Valuation provides a means and well-rounded analysis to the company’s management for financial information disclosure and decision-making.
- Corporate Fundraising
- Business Valuation assesses the intrinsic value of a company on which the negotiation between the company’s management and the potential investors is based for the details of the term sheet, such as the form of investment, investment amount, protective provisions, etc.
- Group Restructuring
- Business Valuation provides an assisting tool for the company that may consider corporate restructuring to streamline its structure and businesses for public investment to ensure a fair and reasonable transaction price and terms in relevant transactions during the process of restructuring.
- Share-based Compensation Scheme
- Business Valuation quantifies the relevant expenses of employee share options (“ ESO”) that are increasingly adopted before going public to align the interests between the employees and shareholders for talents motivation in hopes of business development, by which the company’s management can utilise sensitivity analysis to assess the impacts of ESO in advance for better budgeting.
- Financial Reporting
- Business Valuation supports the company to meet the requirements of financial information disclosure incorporated into the Listing Documents or annual reports, at the time of being an IPO applicant or being a publicly listed company.
- Major Transaction Disclosure
- Business Valuation helps the company present the fair value of the assets or business in a major transaction of which the company is required to disclose certain information in the announcement, including but not limited to the aggregate value and determination basis of the consideration, as well as the value of the subject assets in the transaction.
Types of Valuation Approach
- Income Approach
- In Business Valuation, the fundamental method for income approach valuation is the Discounted Cash Flow (“DCF”) method. Under the DCF method, the value depends on the present value of future free cash flow of a company. The future cash flow is discounted at the market-derived rate of return appropriate for the risks and hazards of investing in a similar business.
- Market Approach
- The market approach provides an indication of value by comparing the subject asset to similar assets that have been sold in the market, with appropriate adjustments for the differences between the subject asset and the assets that are considered to be comparable to the subject asset. In this process of Business Valuation, there are two common methods under the market approach, namely the Comparable Transaction Method or the Comparable Company Method.
- Asset-based Approach
- The asset-based approach considers the cost of re-manufacturing or replacing the assets to new based on the prevailing market price of similar assets, taking into account the past and current maintenance policies and refurbishment records, and deducting the accumulated depreciation caused by the condition, usage, age, wear or obsolescence (structural, functional or economic). This Business Valuation approach will be adopted only when the income approach and market approach are not applicable, such as under a liquidation scenario, as it does not reveal the future economic benefit of a company.