Summary of the latest business valuation methods in 2024

Business valuation is an important and indispensable step in the process of developing and managing a company. This is considered a detailed investigation and evaluation of a company’s activities to determine the existing and potential value of a business. This process to ensure accuracy needs to be based on many factors and can be done using many different methods. The following article by Long Phan will help customers better understand this issue.

Purpose of business valuation

Business valuation determines a company’s true value based on a comprehensive assessment of assets, liabilities, revenue and profits. This process provides the basis for important financial decisions such as acquisitions, mergers, issuing shares or borrowing capital. Valuation results reflect the development potential and position of the business in the market.

Accurate valuation helps stakeholders make the right decisions about investment, purchase or business restructuring. For investors, valuation results are the basis for assessing the profit potential and risks of an investment. For the board of directors, valuation helps determine appropriate development strategies and capital mobilization plans.

Average ratio method

According to Section 1 Chapter II Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024 regulating the average ratio method in enterprise valuation career as follows:

The average ratio method estimates the equity value of the business that needs to be appraised through the average market ratio of comparable businesses.

Market ratios considered for use in the average ratio method include: average price-to-earnings ratio, average price-to-sales ratio, price-to-book value of equity ratio average ownership ratio, ratio of enterprise value to profit before tax, interest and depreciation, ratio of enterprise value to average revenue, ratio of enterprise value to profit before tax and interest average .

Conditions for applying the average ratio method: there are at least 03 comparison enterprises. Priority is given to comparison businesses that are listed on the stock exchange or registered to trade on UPCoM.

How to implement the average ratio method:

• Evaluate and select comparison enterprises according to the provisions of Clause 3 of this Article;
• Determine the market ratio used to estimate the equity value of the enterprise requiring valuation;
• Estimating the equity value of the enterprise requires valuation on the basis of appropriate market ratios to use and make differential adjustments.

The advantage of the method is that it is easy to implement and reflects the current market value. However, the limitation is that it depends on published data and may be affected by short-term market fluctuations. To improve accuracy, it is necessary to carefully select comparison companies with similar characteristics in terms of size, business model and operating market. At the same time, it is necessary to adjust the results according to the characteristics of the business being valued such as growth rate, risk and profitability.

Transaction price method

According to Section 2 Chapter II Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024 regulating the transaction price method in enterprise valuation as follows:

The transaction price method estimates the equity value of the business that needs to be appraised through the transaction price of transferring the capital contribution or successfully transferring shares on the market of the business that needs to be appraised.

Conditions for applying the transaction price method: businesses need to appraise the price of at least 03 successful capital contribution or share transfer transactions on the market; At the same time, the transaction time must not exceed 01 year from the time of price appraisal.

The main advantage of the method is that it reflects the actual value that the market accepts, including resonance factors and growth potential. However, the biggest limitation is that it is difficult to find completely similar transactions and detailed information about the deals is often not fully disclosed. As a fix, data from multiple transactions can be used and appropriate weighting applied. This method is often combined with other calculations to determine a reasonable value range for the business.

Asset method

According to Chapter III of Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024, the asset method is prescribed as follows:

The asset method is a method of estimating the value of the business that needs to be appraised by calculating the total value of the assets owned and used by the business that needs to be appraised.

Determining the value of state-owned enterprises and single-member limited liability companies in which 100% of the charter capital is invested by the state-owned enterprise to convert into a joint stock company using the asset method is applied in accordance with the provisions of Law. equitization law.

The advantage of the method is that it is easy to calculate and is based on real, verifiable data. However, the biggest limitation is that it does not reflect future growth potential and profitability. At the same time, accurately valuing intangible assets such as brands and customer relationships can be difficult. To overcome this, it is necessary to combine with other methods such as discounted cash flow to have a comprehensive view of business value.

Discounted free cash flow method of a business

According to Section 1 Chapter IV Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024 regulating the method of discounting the free cash flow of enterprises career as follows:

The discounted free cash flow method of a business determines the value of the business that needs to be appraised through estimating the sum of the discounted free cash flow value of the business that needs to be appraised with the current value of its assets. non-operating assets of the enterprise at the time of valuation.

Discounted equity free cash flow method

According to Section 2 Chapter IV Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024 regulating the method of discounting dividend streams in valuation businesses are as follows:

The discounted equity free cash flow method determines the equity value of the business that needs to be appraised through estimating the total value of the discounted equity free cash flow value of the business that needs to be appraised. valuation.

The advantage of the method is that it focuses on shareholder value, directly reflecting the interests of investors. However, the limitation is that it depends on the forecast of future dividend policy and financing strategy. To apply effectively, it is necessary to carefully analyze the current and expected capital structure, and accurately evaluate the cost of equity capital. Considering different scenarios of capital structure and dividend policy helps improve the reliability of valuation results.

Dividend discount method

According to Section 3 Chapter IV Vietnam Valuation Standards on Enterprise Valuation issued with Circular No. 36/2024/TT-BTC dated May 16, 2024 regulating the method of discounting dividend streams in valuation businesses are as follows:

The dividend stream discount method determines the equity value of the business that needs to be appraised through estimating the total value of the discounted dividend stream of the business that needs to be appraised. The dividend stream discount method is often applied in cases where the dividend stream of the enterprise that needs to be appraised is forecasted.

Consulting services on business valuation

Business valuation consulting services provide professional and independent assessment of company value. Long Phan – a provider of in-depth business valuation consulting services for each case. Specifically:

• Collect and analyze financial data, industry and market assessments,
• Consulting on applying appropriate valuation methods and developing detailed reports.
• Make strategic recommendations based on valuation results to support the business
• Consulting on legal issues related to the valuation process, ensuring compliance with legal regulations

Business valuation consulting services provide a comprehensive and objective view of business value. This helps business owners and investors make more accurate and strategic decisions in business.

Business valuation requires thorough analysis of finances, markets and prospects. Methods such as weighted ratios, transaction prices, assets and discounted cash flows provide a multi-dimensional view of business value. Customers should consider combining many methods and consult experts like Long Phan for an accurate assessment. Please contact our Hotline 0906735386 immediately for detailed advice.