Valuation Solutions for Expanding Businesses
Why Valuation Is a Strategic Imperative for Growth
As businesses grow — be that organic, a business combination, an acquisition or new equity deals — the numbers behind that growth must be believable and not just compliant, but communicated as well. Valuation is no longer a back-office routine task that is only for accountants. It is a first line strategic weapon that contributes to the price of the deal, financial reporting, investor confidence and tax efficiency.
As businesses grow and expand throughout Southeast Asia and beyond, they can find themselves asking several questions: How do they comply with IFRS? How do they deal with inquiries from investors when they’re raising a round? How do they manage to fairly value assets at various stages of expansion? The range of valuation services needed includes company valuation services, intangible asset valuation services, PPA valuation and much more — all are unique in their application, and all demand the independent, solid analysis that growing businesses simply cannot afford to get wrong.
This article goes into the details of all the valuation needs that can occur as an organisation expands — and how this experience with a specialised, independent valuation advisory services firm like ValueTeam can help an expanding organisation get ready for ongoing success.
1. The Cornerstone of Every Growth Decision : Valuation Solutions for Expanding Businesses
A business should always know its value before undertaking any significant business transaction, business fundraising, or restructuring. When making any growth decision, credible company valuations are the foundation of every informed decision.
The question remains the same for all three groups, Founders who are planning a Series B raise, Management who are due to evaluate an acquisition target, and the Board who are getting ready for a shareholder exit: What’s the current value of the enterprise, and on which assumptions is it based? To answer this question well, one has to undertake a proper business valuation consultancy which is not limited to merely using a standard EBITDA multiple.
Establishing a startup’s worth involves a different formula, one that takes into consideration the future of its cash flow, market size assumptions, and the value of comparable transactions with the less-than-sure historical earnings. In the case of established companies, enterprise valuation services are usually a combination of a discounted cash flow analysis and market-based methods that are used to establish a range of values that is defensible.
Private companies are a special challenge. When there are no public company comparables, private company valuation is highly dependent on transaction multiples from comparable transaction databases, size and liquidity adjustment, and the expertise of a corporate valuation professional, who has knowledge of the relevant sector and geography.
Business appraisal services can be prepared independently and are also regulated. However, in a related-party or cross-border transaction, auditors, tax authorities and regulators are increasingly demanding independent business valuations by qualified third parties to support valuations. ValueTeam’s corporate finance valuation services are designed to satisfy these requirements in Singapore, Malaysia and the ASEAN area as a whole.
2. Accuracy at the Point of Acquisition
Once a transaction closes, the acquiring company is under a time sensitive and technically challenging requirement: allocating the purchase price to all acquired assets and liabilities at fair value. This is PPA valuation territory and where it’s correct can make a huge difference to the closing room.
IFRS 3, the accounting standard for business combinations issued by the International Financial Reporting Council (IFRS) requires the acquirer to recognise and measure identifiable assets, liabilities and any non-controlling interest at their acquisition-date fair values. This means that the IFRS 3 valuation services must be provided by experts who have experience in accounting for the IFRS 3 and the process of valuing each component.
A good purchase price allocation service will consist of multiple interdependent workstreams. There is a need to identify and value each customer relationship, trade name, developed technology, non-compete and order backlog separately. The amount remaining (the balance after assigning value to all the identifiable assets) is then shown as goodwill on the balance sheet.
That allocation and its quality have tangible downstream consequences. The effects of misallocation can be a distortion of amortisation charges, impairment tests and earnings per share. It can also raise alarms for auditors as well as for tax authorities in multiple jurisdictions in cross-border deals. The accounting valuation for the acquisition is, therefore, not a compliance tick box – it is a process that affects the financials reported by a company for a number of years.
Companies with active M&A programmes can benefit from the support of dedicated purchase price allocation experts that can work at speed with the executing teams. ValueTeam’s PPA valuations are tailored to seamlessly fit into the deal process and the audit process to provide fair value assessment services that are completed in audit-ready quality with short post-closing timelines.
Post acquisition valuation services can help fill in any gaps or revisions in previous estimates for businesses that have recently acquired. In addition, for companies who are mulling over potential future transactions, due diligence PPA valuation can help create a clear negotiating position and minimize post closing surprises.
ValueTeam’s financial reporting valuation services are geared to the entire acquisition lifecycle, from deal preparation to audit sign-off, in a variety of industry sectors and deal sizes.
3. The Hidden Driver of Business Value
The greatest value of the business is the knowledge it possesses, which is not necessarily reflected on the bottom line. Historical cost accounting rarely values customer lists, proprietary processes, trained workforces, software platforms and contractual rights at meaningful values — but they are often the drivers of most of the enterprise value. That’s the reason why intangible asset valuation services have become quite a pivotal element of contemporary company financing.
There are many situations in which it is necessary to have a credible valuation of intangible assets. The intangibles shall be separately recognised and measured in accordance with IFRS 3 in an acquisition. Damages resulting from misappropriation of a trade secret or customer database will be based on findings from an independent intangible asset assessment services report. Lenders will want to see a business intangible valuation in a financing transaction and may request it to assist with an assessment of the collateral.
One of the things we value the most and that is often overlooked is the relationship with customers. Customer relationship valuation is based on the multi-period excess earnings method of valuation (MPEEM), which removes the cash flows due to the specific customer base, considering both customer attrition and the likelihood of renewal, and the portion of revenue which would be lost if the customer base were to be lost.
Digital assets have been growing in significance as a sub category. Digital asset valuation services cover platforms, data sets, algorithms and online audiences, which are asset classes that demand unique methodologies because their value is often dependent on the platform’s networks and their value-chain is more complicated than its individual asset methodology.
Goodswill acquired is subject to annual impairment testing in accordance with IAS 36, which involves a formal review of the carrying value’s supportability. Valuation of Goodwill and intangible assets for impairment purposes is based on the recoverable amount of cash-generating units; which is derived from financial forecasting and market-based inputs.
The engagement can be for financial reporting, transaction support or dispute resolution, and ValueTeam’s intangible asset consultancy and team of intangible asset valuation experts has a wealth of sector knowledge and methodological rigour to every engagement. Our intellectual asset valuation work conducts across technology, healthcare, consumer goods, financial services and professional services industry.
4. Unlocking the Value of Innovation
Whether it’s a medicine company with a molecule protected by a patent, a consumer brand relying on trade dress and storytelling, a software company selling code and algorithms that define the value of its enterprise, or something else entirely, the value of intellectual property is at the core of the competitive advantage of a wide variety of businesses. IP valuation services are thus applicable to most industries and any kind of stage of development.
There are four common areas where the need for a IP valuation consultancy comes into play, namely: in transaction (e.g. licensing, sale, or acquisition of IP assets); financial reporting (e.g. recognising IP on acquisition under IFRS 3); taxation (e.g. transfer pricing and IP holding structure reviews); and in dispute resolution (e.g. quantification of damages in IP infringement cases).
The patent valuation expert should not only be able to value the patent’s remaining legal life, but also the economic life of the underlying technology, the freedom to operate in the relevant market, and the likely competitive response in the relevant market. For these judgments, the knowledge of life sciences and the ability to model the finances are combined with technical knowledge.
For brand owners looking for trademark valuation services, analysis must be conducted to distinguish the value of the brand mark from the value of the underlying business or product. The method of relief from royalty is very common for this purpose — the method involves recognising the notional royalty that will be incurred if the trade mark was licensed from a third party and the cash flows of the royalty income recognised as capital receipts.
Creative industries and media companies can use copyright valuation services for literary, artistic, musical works and software copyright. The life of a copyright is highly dependent on its life expectancy, income to be generated from that copyright, and the competition for the underlying content.
Defensible technology valuation services are crucial for technology companies engaged in licensing or IP transfer transactions, especially for those with cross-border transactions, to meet arm’s-length transfer pricing obligations. In this context IP valuation for transactions has to be strong enough to face the scrutiny of tax authorities in several jurisdictions.
ValueTeam’s IP asset valuation and intellectual property assessment services are based on a blend of financial modelling, industry knowledge and legal insight. From multinationals, IP-intensive SMEs, law firms and tax advisers, our brand and IP valuation services are being utilized by a number of firms throughout the region.
5. Aligning Talent with Long-Term Value Creation
Employee share programmes are one of the strongest weapons in the arsenal of any business looking to attract, retain and motivate employees, particularly in expansive companies. However, accounting and regulatory obligations for equity compensation have become more complex; and the demand for quality-equity valuation services has been increasing.
The grant date fair value of share-based awards must be recognised as an expense on a straight line basis over the vesting period in accordance with IFRS 2. This needs share based compensation valuation which accurately reflects the features of the options, such as exercise prices, vesting periods, performance requirements and expected volatility. Listed companies are the easiest to handle when it comes to inputs. The private companies especially face one major difficulty when it comes to startup ESOP valuation: since there is no market price to observe, all assumptions concerning volatility, term, and liquidity discount need to be carefully balanced.
The most popular options valuation models are the Black-Scholes model, used for options with simple features applicable in a market setting, and the binomial lattice model, used for options that have market conditions or path dependent features. The heart of the share option valuation consultancy problem is the selection (and the population) of the right model, together with defensible assumptions.
In addition to accounting, the fair market value of the ESOP is also frequently needed for tax reporting purposes. In most places, the difference in exercise price and value of the shares at the time they are exercised is taxed to the employee. If the fair market value has not been determined independently, there is the possibility that the tax authorities will question the stated value which could mean unforeseen obligations for the employer and employee.
If boards and remuneration committees are considering new equity compensation plans, equity compensation valuation conducted at the design phase will help them ensure that the proposed grants are the correct size, fair price, and will be properly valued from the start. Whether you are a start-up business issuing your first option pool or a public Company with a complicated multi-jurisdictional equity plan, ValueTeam’s equity valuation services and team of ESOP valuation experts will offer your company the support it needs.
6. Measuring the Asset Behind the Name
A brand is more than a logo or tag-line. It is an asset – one that commands price premiums, fosters customer loyalty, draws talent to a business and forms the long term commercial franchise of a business. BUT, if it is so important, there is a misconception about the value of the brand, and sometimes it is underestimated and not properly quantified. Therefore, there is a need for credible brand valuation services to be included in the strategic finance toolkit.
There are various situations which call for the demand of brand equity valuation. When a company merges with another or acquires a company, the acquirer must determine what portion of the acquisition cost is for the target’s brand and not other assets. When a business uses a trademark or brand under a licensing or franchising agreement, the value of the trademark or brand is used to calculate the royalty rate that represents the portion of revenue generated by the use of the trademark or brand. When calculating brand damages in litigation, an independent valuation of the brand is needed to determine the economic effect of the infringement or dilution of the brand.
Companies with multiple brands (whether through acquisition or organic growth) can use corporate brand valuation to help make decisions about their brands and their investment portfolios: whether to invest in any of them, whether to license or sell out, or whether to phase them out for a stronger master brand. Such a brand asset valuation analysis can convert the brand strategy from intuition to evidence-based decision making.
Global brand valuation services are needed for large companies and multinationals with brands that are active in different markets, taking into account currency differences, differences in level of brand recognition, and differences in jurisdictional benchmarks for royalty rates.
Marketing and communications professionals have begun to leverage marketing asset valuation to provide hard data on ROI of brand investments and to help build a case internally for brand investment as a long-term value driver, not a short term cost. Business Brand Valuation experts at ValueTeam seamlessly connect brand strategy and financial reporting, making the measure of brand value more than just an assertion.
7. Valuation Solutions for Expanding Businesses: How These Services Work Together in a Growth Context
Businesses that are expanding are seldom going to require only one valuation service. Growth makes several valuation requirements at once and a single team with the ability to provide a wide range of valuation advisory services is generally more efficient than multiple specialist teams.
Let’s take an example of a tech company that has just acquired a company. The business team requires PPA valuation to provide financial reporting support. The IP team require the services of intellectual property valuation in order to value the acquired software platform and patents. The HR team requires ESOP valuation services to value the equity retention awards that they are providing to the target’s key engineers. The CFO has to provide the services of company valuation to back the investor update that will be linked to the next funding round.
These all overlap in the similarities of their workstreams. The goodwill figure will be affected by the assumptions made in the purchase price allocation services and this will impact the impairment risk assessment. The intangible asset valuation services related to the acquired IP will be used for the accounting purposes as well as the transfer pricing analysis. The business valuation consultancy for the investor update should be consistent with the acquisition accounting.
Having one team working together who are aware of all these interdependences, and who have the corporate valuation experts to work in each of these areas will minimise the risk of inconsistencies and speed up the overall timeline. ValueTeam is designed just for this purpose.
Conclusion : Valuation Solutions for Expanding Businesses
Valuation is not a “commodity service”. It will, when done right, provide certainty in transactions, credibility in financial reporting, clarity in strategic decision-making. When done badly, or not at all, it poses risk: the risk of regulatory, audit, tax and just not understanding what you’ve built or acquired is really worth.
Whether you’re involved in company valuation services, acquisition accounting valuation, valuation of your brand or employee share valuation, expanding businesses have a variety of valuation demands to face. While each service has a specific focus, each also requires thorough, independent and commercial analysis provided by professionals who not only have the technical requirements, but also an understanding of the business environment.
ValueTeam is designed to fulfill that need — and to continue to be your valuations partner as your business expands.