I. Current state of enterprise valuation demand
Vietnam is in a developmental phase, with an economy that includes both domestic and international investors. It promotes frequent mergers, acquisitions, and consolidations of enterprises. To implement such procedures, both an enterprise and its partners must have a comprehensive understanding of themselves and each other, helping facilitate smoother transactions and ensuring mutual benefit. Therefore, enterprise valuation is essential to determine the company’s worth, operational capacity, capital structure, and potential future profits.
II. What is a valuation of an enterprise?
To clarify what a valuation of an enterprise is, we must first understand what an enterprise’s value entails.
An enterprise’s value includes the value of its capital (equity) and the total value of all assets used in its business operations. For investors, a company’s value is typically considered from two perspectives: liquidation value and going-concern value.
- Liquidation value is the amount that could be realized if all the enterprise’s assets were sold off due to cessation of operations.
- Going-concern value is the present value of the enterprise’s expected future cash flows.
Thus, enterprise valuation refers to the process of using valuation methods to determine an enterprise's worth.
III. Why is the enterprise valuation necessary?
Valuation is typically conducted when an enterprise ceases operations or is put up for sale. However, even during regular operations, enterprises should ideally conduct a valuation at least once a year because:
- It helps enterprise owners understand the company’s condition and make quick decisions in case of unexpected events, and be proactive in pricing when considering selling the enterprise.
- Knowing the enterprise’s value allows owners to seize opportunities for mergers and acquisitions.
- It builds trust with investors, customers/clients, and banks when seeking investment, acquiring clients, or applying for loans.
IV. What is the purpose of enterprise valuation?
Valuation serves the needs of all parties involved in a transaction by helping them agree on an enterprise's value. Therefore, valuation plays a crucial role and serves multiple purposes, including:
- Issuing and publicly offering shares to raise capital;
- Demonstrating cash flows and financial capacity;
- Restructuring or reforming the business, altering business strategies, and improving performance;
- Implementing equitization, capital contribution, joint ventures, mergers, acquisitions, or consolidations;
- Fulfilling other legal purposes.
Depending on the intended purpose, enterprises may choose appropriate valuation methods to ensure the procedures are law-compliant and efficient.
V. Latest enterprise valuation methods
To conduct a valuation, different methods may be used, each with distinct approaches:
- Average ratio method: Estimates the owner’s equity value by comparing the average market ratios of similar enterprises.
- Transaction price method: Estimates the owner’s equity value based on successful transactions involving share or equity transfers of the enterprise in the market.
- Asset-based method: Estimates the value of an enterprise by summing up the value of all assets owned and used.
- Discounted free cash flow (FCF) method: Determines the value of the enterprise by estimating the sum of the discounted value of the free cash flow of the enterprise with the present value of the enterprise's non-operating assets at the time of appraisal.
- Discounted dividend method: Calculates the sum of the discounted value of the dividend stream of the enterprise.
- Discounted free cash flow to equity (FCFE) method: Determines the equity value of the enterprise by estimating the sum of the discounted free cash flow values of the equity of the enterprise.
VI. How to determine the value of a business
To determine an enterprise's value, companies must undergo a valuation process in accordance with legal regulations. Valuation is performed by licensed firms that meet statutory requirements. Once the valuation is completed, the enterprise will receive a Valuation Certificate confirming its value.
VII. Reputable enterprise valuation service providers
Enterprises in need of valuation must select licensed firms listed by the Ministry of Finance. Any firms not included in this list are not legally authorized to perform valuations.
In summary, enterprise valuation must be implemented by qualified entities using established valuation methods tailored to the enterprise’s specific needs.
If you require advice regarding enterprise valuation, please contact us:
