Why Conduct Business Valuation? Top 5 Interesting Situations

In view or the lackluster economic climate given the Covid-19 pandemic, here are some case scenarios in which business owners will do well to assess the market value of their firms by conducting a business valuation.

Public-listed companies that are listed with BURSA Malaysia come with listing status while their stocks and share prices, being determined by the market place, is tradable by anyone. On the other hand, non public-listed firms are represented by medium-size or Small and Medium-sized Enterprises (SME) with various ranges of revenue and profit levels.

The essential quest ion here is why is it vital to know one’s firm value? And, when do you need to do a business valuation exercise?

Obviously, some situations are critically essential to have a valuation done given the reasons below. Here are top five situations outlining why valuing– one business market value (business valuation) is key to navigate the storm.

Acquisition and disposal of share interest.

Whenever a firm is met with such a situation, both parties comprising potential purchaser and the business owner, need to determine a fair consideration for the exchange of value. This is no different from a typical transaction of the price for a property in which a Registered Valuer would conduct a valuation exercise to derive the market value for the consideration of both parties to negotiate an eventually complete the transaction.

In business, there are more metrics and parameters to consider when deriving a fair market value, which makes it much more complex – unlike when dealing with real estate valuation.

Fair market value in financial reporting.

Sometimes, companies invest in another company as a subsidiary or associate company. It is then wise to have a Fair Value of the company’s interest reflected in its balance sheet.

A split of assets / exit of partnership / new partner joining.

In many companies’ enterprising journey, there will come a juncture whereby the above situation may occur. Thus, it is only fair to have an objective-driven business valuation done to ensure all of them are well compensated.

Development of the business.

An excellent overall measure of a business is when the company increases its market value over time. So sometimes, a business valuer can work hand-in-hand with the business owner to review and advise him or her to focus on the area that can increase the firm’s value.

At the same time, many business owners are too engrossed with their operations while not being able to kind of raise themselves to look at the bigger picture. For example, the large sales volume of a firm may not be the best of value for the firm because of many other considerations such as return or margins and return on equity, days of sales, stock turnover and etc. Thus, a business valuation exercise may be required.

Raising of funds.

Some companies may need to raise funds from others when they see the potential of growth for their business while facing capital resource limitation. Incoming funders will definitely need to assess the business in terms of its potential of return, ability to generate profit, and market value at that point in time. The above are some situations that may require the service of a business valuer. There are some even more unique situations that will require a business valuation.