This is a popular question amongst generations of entrepreneurs across Singapore and Malaysia; and its answer lies in the reason for a business valuation, as different circumstances call for different “standards of value” and hence different sets of playing rules.
Some Of The Main Possible Reasons For A Business Valuation Are As Follows:
- Financial reporting
Singapore follows the accrual-based accounting standards – SFRS(I)s (the Singapore Financial Reporting Standards (International)), SFRS for Small Entities, and FRS (the Financial Reporting Standards).
Malaysia then uses the MFRS (the Malaysian Financial Reporting Standards), which completely complies with IFRS (the International Financial Reporting Standards).
All businesses incorporated in Malaysia are required to do financial reporting, while only the publicly listed businesses in Singapore are mandated to do regular financial reporting – it is optional for small ventures.
Business valuation in this context usually involves setting the value – or the purchase price – of the entire business based on the value of its assets and liabilities; and include this value in the financial statements. Here, it is also important to evaluate identifiable intangible assets not found on the balance sheets, like goodwill, customer base, patents and brands.
As most in-house accounting staff are not as adept in accounting for these intangible assets, it is definitely worthy to engage external professionals with the relevant expertise.
- Gifting, estate and other tax purposes
Estate planning is necessary for sustainability of a family held or closely held business interest, and it allows a proper passing on of the ownership to the next generation. In such cases, early planning would help reduce the drama and estate taxes that the receiving heirs will need to pay later.
Sometimes such a transfer of ownership occurs as a form of gifting using various estate planning tools like family limited partnerships or trusts.
Such similar transfer of ownership is also applicable in the death of a shareholder.
Taxes will then be calculated based on a “qualified” business valuation by a “qualified appraiser”. Here, again, it is worthy to engage an neutral external expert to to conduct the business valuation, taking into consideration appropriate and valid discounts for the lack of control and marketability.
- Business planning
This form of internal purpose is a primary need for business valuation.
A business owner will tend to be curious of his/her business’s worth in the marketplace, either to improve on that value or to evaluate capital investment options. Substantial information, like the impact of cash flows, is always more reliable than a gut feel or instincts.
As most business owners tend to conduct their own business evaluation for this purpose, they end up deriving a useless estimation from the oversimplified, vague and outdated standards in the industry.
Hence it is still better to engage an external expert, who is able to build forecasting models that can evaluate the various assumptions and their impact on the overall business value. This helps to estimate the cost of capital for analysing the discounted cash flow, or analyse the “hurdle rate” when evaluating the rate of return of different investment options.
It is also vital to know how the business is perceived. Hence the fair market value would be relevant for ideal buyers, whereas the investment value would provide more valuable insights for specific “strategic” buyers, who are more willing to pay a premium above the fair market value, as they are more concerned with the synergy of the business.
- Business litigation, which includes oppression cases or marital dissolutions, or shareholder disputes
Here, a suitable standard of value would be defined by the government rules and regulations, which differs between Singapore and Malaysia. Hence valuation discounts may or may not be considered for the valuation of a particular business interest. In some divorce cases, there may or may not be special treatments for goodwill too.
A native valuation expert and attorney are usually familiar with the government guidelines, and can provide the relevant support and advice. Hence they are able to succinctly lay down the appropriate parameters for the business valuation to make it as fair for their clients. They can better help to substantiate the results of the business valuation in court settlements, and avoid any unnecessary legal attacks from the opposing parties and impending consequences.
- Buy-sell agreements
These are important for all businesses to avoid any unwanted litigation or awkward negotiations in case of shareholder dispute, or the death of a shareholder or business owner.
For such agreements, all parties would have to agree on the value of the business. Hence they must be made before relationships start to sour and two opposing sides emerge.
Under the circumstances, it seems natural to engage an neutral external party to be involved in the business valuation to ensure that it includes all the crucial elements, such as:
- Buyout terms and timeline
- Process of hiring and paying an appraiser
- Relevant valuation methods
- Appropriate standard of value
- Application of valuation discounts for marketability and lack of control
Depending on the size of the business interest or the triggering event, the above elements may change accordingly. So a 60% general partner interest can be valued on a controlling basis, while a 1% limited partner interest is valued on a minority non-marketable basis. Also, there can be different processes of buyout for different circumstances, such as between the death of a shareholder or business owner versus a voluntary sale.
The main thing to note for valuing a business is that there are different answers to the same question. This is simply because the value of a business depends a lot on the meaning of the business valuation.
Though counterintuitive, a business value is unique to a circumstance as market conditions may change, different rules may apply, and different standards of value may be valid. Hence business owners should not simply use outdated appraisals – they may work brilliantly during their times but may not be brilliant enough for the current times.
The best answer to the question “What is the value of my business?” can hence be obtained from the intended use of a business valuation after consulting with a neutral external expert.
Get information about your business from a business valuer.