Common Mistakes to Avoid When Valuing a Singapore Business

Well, Singapore is a hub for businesses. It is located in the heart of Southeast Asia with a strong and diverse economy. In this regard, it is essential to understand business valuation as well as the crucial mistakes to avoid when valuing a business in Singapore.

Business valuation

Before we begin examining the common mistakes you should know when valuing a business in Singapore, it is important to learn about business valuation in general. Business valuation is defined as a systematic process for determining the value of a business. It is an analytical process that involves observing, studying, calculating, researching, and analyzing several important factors related to the business based on which a value for the business is determined. The following section will briefly cover the concept of business valuation in Singapore.

What is a business valuation?

Business valuation is the process of determining the value of a business based on several factors including projected cash flows, assets, liabilities, the market value of comparable companies, and other relevant factors. Likewise, business valuation can help to form strategies, plans, and tactics for improving a business. In this regard, it is a multi-dimensional process that involves the use of several methods and techniques as well as calculations. Thus, business valuation is generally required at every stage of a business’s life cycle, including startup, expansion, and exit.

Why do you need a business valuation?

Probably, the most significant reason for carrying out a business valuation is to ascertain the fair value of a business. The following are a few more reasons that will help you to understand why you need a business valuation:

For mergers and acquisitions (M&A) – It is a common practice for companies to merge or acquire other businesses. This process involves a great deal of due diligence and research by the company. As a result, business valuation is a critical step in the M&A process.

To make strategic decisions – Business valuations help in the formulation of business strategies and directions. This enables a business to make informed decisions for growth, development, and expansion.

For financing – Business valuation is crucial to any type of financing, whether it is a loan, debt, or equity. The reason is quite straightforward; most financial institutions or potential investors provide funding based on the business valuation.

To form employee benefits and retention plans – From stock options and phantom stock plans to 401(k) plans, business valuation is pivotal for establishing employee benefits. This is because when a base value is established for the business, this allows for proper allocation.

Taxation and financial reporting – According to Financial Reporting Standards (FRS) in Singapore, businesses are required to submit financial documents annually. In addition to this, the tax liabilities of businesses can be calculated based on the declared business valuation.

How to value a business in Singapore?

To value a business in Singapore, the first step would be to choose the appropriate valuation method and technique. There are several business valuation methods, including the income-based method, asset-based method, and market-based method. After you have decided on the valuation method, it is essential to calculate and analyze the various factors that are required for business valuation.

While the required inputs depend on the valuation method chosen. For this, you can either use your calculations or use an online business valuation calculator from Eqvista. As a result, you can get an exact business valuation for your business. However, you might be confused about how to do these valuation methods even work. Below mentioned are some of the commonly used methods.

Approaches for business valuation

There are several approaches to business valuation and each method involves different inputs and techniques. Some of the commonly used methods for business valuation are as follows:

Asset-based method – The asset-based approach tends to be the most prevalent method for business valuation in Singapore. The idea behind this approach is that businesses are valued by taking into consideration their net asset value (NAV). The NAV is derived by adding up the value of all tangible and intangible assets of a business, like property, equipment, goodwill, inventory, etc., and then subtracting the value from total liabilities. Therefore, the value of the business is based on the NAV.

Market-based method – Another widely used method for business valuation is the market-based approach. The value of a business is calculated by referencing the price of similar companies as determined by a market pricing study. This may involve multiple comparable companies based on their size, industry, and business sector. This method is most beneficial in estimating a value of a company in the case where sufficient comparable data is available in the market.

Income-based method – The income-based approach is based on the projected future cash flows of a company. The most common calculation involves discounting the projected cash flows for the next five years to determine the present value of a company. It is one of the most widely used methods but it is considered to be more subjective as it depends on the accuracy of the assumptions about future cash flows. As a result, realistic estimates and forecasts are required for the application of this method.

Considerations of business valuation in Singapore

Now that you have understood the concept and approaches for business valuation let’s look into the factors you must consider while valuing a business in Singapore. Well, several inputs and factors are taken into consideration while valuing a business, and thus it is essential to analyze and assess them before arriving at a result. The following section focuses on the factors that need to be considered while carrying out business valuation in Singapore, including the common business valuation mistakes as well as some tips to overcome them.

What are the factors to consider while valuing a business in Singapore?

Business valuation is carried out to get a clear picture of the value of a business. While this might seem like an easy task, it requires a lot of analysis and research. Here are some factors that are considered while valuing a business in Singapore.

Assumptions and estimates – Most often, the assumptions and estimations made while valuing a business can affect the outcome greatly. It is because these assumptions are an integral part of the calculations involved in business valuation. Thus, it is important to ensure that all assumptions used for valuation are realistic and based on facts.

Valuation techniques – A valuation technique is commonly chosen to determine the business value. The outcome depends on the accuracy and applicability of the chosen method. Therefore, ensure that you are choosing a suitable method for your business, which requires in-depth analysis and research.

Growth prospects – A business valuation is essentially a reflection of the past performance of the company and its growth prospects. For this, it is essential to consider the growth prospects of the business and its nature based on various financial statements. In fact, in startups, business valuation is generally determined based on growth prospects.

Common mistakes during valuing a business in Singapore

While it is important to carry out a business valuation for your company, it is even more critical to be thorough and accurate with your analysis. The following are some common business valuation mistakes that most valuers encounter while valuing a business.

Solely relying on the discounts and multiples – As a matter of fact, discounts and multiples such as EBITDA multiple, a revenue multiple, discounted cash flow, or price-to-earnings multiple can be useful in valuing a business. However, sole reliance on discounts and multiples may not be sufficient.

Misconceptions for comparable companies – Business valuation using a market-based approach can be highly subjective as it is based on the comparison of similar companies. Oftentimes, when valuing a business, the valuer might make incorrect assumptions or make comparisons that are unsuitable to the business.

Ignoring the financial statements – Financial statements are the key to understanding how a business has performed. Many valuers ignore the financial statements while valuing a business instead they rely on forecasts. In this regard, it is recommended to go through financial statements for more accurate results.

Unrealistic projected cash flows – Often, companies tend to show over-optimistic projections for their future cash flows, and hence it can impact the valuation. As a result, considering all the facts and figures and realistic projections are very critical in business valuation.

Failing to assign a value to intangible assets – Intangible assets like goodwill and intellectual property can significantly affect the valuation of a business. Since intangible assets are non-physical, they can be difficult to value. However, it is essential to value them using various techniques to arrive at a fair result.

How to avoid common mistakes during the business valuation?

Business valuation is necessary for any business. However, sometimes it can be difficult to arrive at the exact value of a company. Therefore, following some simple tips can help you determine the fair value of a business in Singapore.

Using multiple methods – It is always recommended to use a variety of methods for business valuation. The aim is to get an objective and accurate result for business valuation. Thus, using a combination of methods helps in arriving at a more accurate result.

Identify the key inputs – Make a list of all the important parameters and attributes that you need to consider while valuing a company. In this way, you can arrive at an accurate result with minimal errors.

Consider the other factors – From research, analyses, and calculations to assumptions, estimations, and projections, it is essential to consider all the factors while carrying out the business valuation.

Hiring third-party professionals – Third-party professionals are highly skilled and experienced in conducting a business valuation.

Conclusion

At every stage of the business life cycle, business valuation plays an important role. However, there are various factors to consider while carrying out a business valuation in Singapore.