Business valuation is the process through which you can determine the economic value of your business or an organization. There are various circumstances when business valuation becomes essential. For instance, you might be interested in selling your company for taxation purposes. Being familiar with the value of your business is important so you can make a smart decision about your company.
Owners and managers of companies in Malaysia usually make use of professional business valuation services to get an objective estimate of the worth of their business. This information is also important in negotiations with shareholders and potential investors.
There are numerous ways of evaluating the value of a business. Generally, all of these methods produce a comprehensive and objective report of your company’s value. The following are the top seven business valuation methods used in Malaysia:
Method # 01 – Market Value Valuation
The market value business valuation method is a subjective method of measuring a company’s value. The primary step involved in such a method is comparing the value of your company with similar businesses that have been sold.
This type of business valuation method is only feasible for those businesses that are able to access comprehensive records of their competitors. However, it is not suitable for sole proprietors because it is very challenging to obtain data about such competitive businesses. Furthermore, there is a very high chance of incorrect or imprecise calculations using the market value valuation method.
Therefore businesses can only rely on this method if they are confident that they will be able to negotiate the final value if they are looking for investors or buyers. Otherwise, another business valuation method should be used.
Method # 02 – Asset-Based Valuation
Asset-based valuation is an efficient business valuation method used in Malaysia. It involves finding out the company’s total net asset value and subtracting the value of its liabilities. Businesses that are going to continue operating should use the going-concern method to evaluate the company’s value.
On the other hand, companies that are going to shut down or are operating with the assumption that the business will be finished in the near future should implement the liquidation value asset-based valuation. In such a scenario, the value is determined based on the net cash that the owners will have in cases of business termination.
You should remember that using the liquation-based valuation approach means the value of the company’s assets is likely to be lowered due to differences in market value.
Method # 03 – ROI-Based Valuation
As the name suggests, an ROI-based valuation method determines the value of a business depending on the profits and the type of return on investment an investor is going to receive by purchasing or investing in your company.
It is a very useful business valuation method being used in Malaysia, especially from the investors’ perspective. They get all the essential information about potential ROI before investing in a company. However, ROI tends to fluctuate a lot due to evolving market conditions which make the ROI-based valuation method extremely subjective.
Method # 04 – Discounted Cash Flow Valuation
The three business valuation methods discussed above are the most common ones in Malaysia. However, other methods like DCF valuation are also used. It is also called the income approach valuation because it involves evaluating a company’s value based on its projected cash flow. It is a very useful valuation method, especially when you are not expecting a huge rise in your profits anytime soon.
Method # 05 – Capitalization of Earnings Valuation
The capitalization of earnings valuation method is like an extension of the DCF valuation method. It involves calculating the business’s value based on its cash flow, annual ROI, projected profits and value. It is suitable for stable companies that are not expecting many fluctuations in their overall finances.
Method # 06 – Multiples of Earnings Valuation
A business’s potential to generate revenue in the future is the basis of the multiple of earnings valuation method. In this method, a multiplier is assigned to the current revenue to calculate the overall worth of the company. The multiplier is decided on the basis of the company’s projected profits, industry situations and other such factors. It is not commonly used because the reliability of the value evaluated through this method can greatly decrease due to a number of factors.
Method # 07 – Book Value Valuation
Book value is another business valuation method used by some organizations in Malaysia. It involves calculating the value of a company by looking at the balance sheet of a company. A balance sheet contains all of the essential information about the value of the equity, total assets and liabilities that are critical to evaluating the right value of a business.
The book value valuation method is beneficial for businesses that have low profits, but a large number of valuable assets.
In a Nutshell
These are the most popular business valuation methods around the world, including Malaysia. You should remember the fact that business valuation is a complicated process and every organization must determine the most suitable valuation method, depending on the scale of the business and the industry in which it is operating.
It is not necessary to use just one option. Instead, using multiple valuation techniques and combining the results allows companies to get reliable and accurate results. For more information, feel free to get in touch with us.