Valuation BasicsValuation ApproachBusiness Valuation Singapore Basics 101 

Business Valuation Singapore Basics 101 

 

 

Business Valuation Singapore

Starting a business requires a clear understanding of the owner’s objectives and goals, as this will facilitate succession planning. One common approach to succession planning is selling the business, which may not be initially considered by many owners but could be regretted later, particularly if the business becomes successful and attractive offers arise.

To begin exploring options for selling a business and understanding their objectives and goals, business owners can undergo a business valuation. This valuation serves as a starting point for any future analysis, whether it is related to business or personal matters.

The important questions to consider for a business valuation is as follows:

• What is the business valuation for?
• What is the role of a business valuation in the process of selling a business?
• What determines the value of the business?
• How is the value of the business calculated?
• How can the business owner maximise the business value?

Below we will delve into the key considerations arising from the questions above. We will first discuss the three main purposes of conducting a business valuation, followed by an overview of the five types of values and their respective standards.

 

Purposes of a Business Valuation

A business valuation serves various purposes, some purposes could be:

 

1. To fulfill tax requirements

In Singapore, businesses are required to pay government-enforced corporate taxes on profits and income. Accurately determining the value of the business is crucial to ensure that the correct amount of taxes is paid, and unnecessary payments and losses are avoided.

2. For exit planning (transactional)

When considering options such as a transfer of ownership or employee stock ownership, it is essential to have a clear and transparent understanding of the business’s financial status. This information is particularly vital in the context of mergers and acquisitions (M&A).

3. For litigation

In situations such as shareholder disputes or divorce proceedings, it is necessary to determine the value of individual ownership and contribution to facilitate a fair compensation or return on investment. A business valuation can help work out damages or create a fair buy-sell agreement.

 

These Five Bases of Values Are Commonly Used in a Business Valuation

1. Market value: This is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, where the parties had each acted knowledgeably, prudently, and without compulsion.
2. Fair value: This is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
3. Investment value: This is the value of an investment to a particular investor based on individual investment requirements and expectations.
4. Synergistic value: This is the value that results from the combination of two or more assets or businesses, which creates greater value together than they would individually.
5. Liquidation value: This is the estimated amount that could be realized from selling all assets of a business in an orderly liquidation, given a reasonable amount of time to find buyers, with the seller being compelled to sell on an as-is, where-is basis.

 

 

There are three main methods for determining the value of a business:

1. The Asset Approach

This approach values a business based on its net asset value, which is the difference between its assets and liabilities, or simply put, its equity value. However, this method assumes that a business has no intangible value, which means that it is a strong indicator of the impact of intangibles, such as goodwill, on the overall value.

2. The Market Approach

This method involves comparing the business to a sample size of similar companies. There are two ways to make this comparison: the Comparable Transaction Method (CTM) and the Public Company Guidelines Method (PCGM). The CTM focuses on the sale of the business to another buyer, while the PCGM compares the target business to transactions of comparable companies in the stock market. This method is less viable for private businesses because data on them is not publicly available. Therefore, valuation experts tend to use market-based multiples, such as the earning ratio, and adjust them based on the differences in the potential level of growth and risk between the target business and comparable companies.

3. The Income Approach

This method estimates the value of the business based on its expected future cash flow or operating income, which represents its present value. The two main variables in this estimation are the discount rate, which represents the cost of capital, and the earnings of the business. Many experts consider this method to be the most accurate for determining the value of a business because it is based on the business’s expected returns.

 

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