Feature Article

  • Business Valuation – Business GPS for SMEs

     

    By Jean-Baptiste ROY, Associate Director, Censere

    SMEs in Hong Kong

    According to the Hong Kong government statistics, companies with less than 50 employees are considered as “small” companies and companies with 50-99 employees are “medium” companies. There are in total 347,436 SMEs with less than 100 employees in Hong Kong in 2012. Among these companies, around 98.9% (343,606) are in the “small” category. These companies mainly belong to the retail and the import/export trade & wholesale sectors. How do those “small” companies monitor their growth in value?

    Why SMEs Would Like to Know How Much Are They Worth?

    There are many circumstances where SME owners would need to value the business or the assets they own. There are seven main reasons:

    1. Capital Injection: Some SMEs might want to expand their business for various reasons. An essential step for business expansion is to receive capital injection from external investors, such as private equity funds, corporate partners or other resources. Before a business can secure a capital increase, an independent valuation of the shares of the company is important to make sure the deal is fair to all parties.an-Baptiste Roy

    2. Employee Stock Option (ESO): Some companies might grant company’s stock to their employees as part of the remuneration to motivate the employees to help to boost the company in its early stage. Valuation is required to assess the company’s stock price as part of the ESO process.

    3. Merger & Acquisition: M&A is a very common business activity for business consolidation and development. For instance, when a company wants to grow faster or have a different strategic positioning than its competitors, it might want to acquire other companies. Business valuation is required before the completion of the M&A deal. Always keep in mind that the buyer and seller could have quite different points of view and motives to do the deal.

    4. Shareholding restructuring: Several shareholders own a private business and some want to sell their shares to the others. The collaboration with an independent valuer would solve part of the equation by establishing a starting point for the price of the shares.

    5. Transmission preparation / Trust set-up: To facilitate the transmission of your business, it is often the case that owners of private businesses will transfer their business into special vehicles. To complete this process and to know how much value is transferred, the engagement of an independent valuer would be needed.

    6. Strategic Planning: As business owner, you need tools to drive your business. Knowing how much it is worth today assists you to make the right decisions about future alternative. Also performing this exercise highlights which parts of the business impact the most on its value and what should be done to grow its value faster.

    7. Listing: In an initial public offering (IPO), the business valuation plays a role in assisting to determine the price of the shares offered by the issuer.

    The Role of an Independent Third Party in Valuing a Privately Held Business

    There are two key reasons for inviting a third party to independently value your business. First, for all the cases detailed previously, third party participation can ensure an objective and independent result for reference. For example, an intermediary with a vested interest to buy or to sell a business may not always have the interest to maximise the existing shareholders’ value. It may over-value or under-value the business or the intermediary could be motivated to complete a sale to receive his fee. Second, SMEs are usually not as structured and have fewer resources compared to large corporations. They might not have the personnel with relevant knowledge and professional skills to do valuation as well as time available to work on it.

    Common Approaches for the Valuation of SMEs

    The value of a SME is usually determined by several components; the assets held by the business, actual earnings of the business and future revenues & potential growth of the business. There is no single method which is ideal for all kinds of businesses and situations. The valuer’s first decision is to choose an appropriate method. Methods fall within three broad approaches; Asset based/Cost Approach, Market Approach and Income Approach. Although all three approaches are widely adopted, in real practice, a valuer has to carefully consider the situation and condition of the subject to be valued. The Market Approach is usually the most commonly understood approach. However, it is difficult to apply for private businesses such as SMEs because they had to be distinct and it is often not possible to find perfect comparables and publicly available transaction data.

    Conclusion: An Independent Advisor - Your Companion in Achieve Business Success

    Every businessman wants to make a gainful investment with accurate forecasts of future return. This is the professional specialty of a business valuer. A successful business usually means a series of investment activities. Therefore, you should not regard a business valuer as a service provider who merely helps you to complete a one-off valuation task. Business valuers keep updating the ever-changing regulations, valuation methodologies as well as market information. A valuer not only provides technical support but also insightful market forecasting as a powerful strategic tool. A good long-term investor-valuer relationship is an important factor to be successful. A driver might not need a GPS to find his way; however, a GPS can show a driver the most efficient way to get there.

    This article was published in EXCHANGE, the Magazine of The Canadian Chamber of Commerce in Hong Kong, Vol. 9, Dec 2012

    If you have further question, please contact incite@censere.com

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