Valuing a business via its income still preferred in Asean: study

EARNINGS before interest, tax, depreciation and amortisation (Ebitda), and using the income approach are methods Asean business executives prefer when valuing a business, a joint study by the Institute of Valuers and Appraisers, Singapore (IVAS), and Ernst & Young Solutions (EY), has found.

Valuing a business via its income continues to be the top approach used by 88 per cent of respondents, with the market approach coming in a close second at 81 per cent.

When using the market method, respondents voted overwhelmingly in favour of Ebitda as the preferred yardstick of business value, with revenue coming second.

"We believe this can be explained by technology startups becoming commonplace across Asean; revenue then becomes a better base for value than profits," said EY.

When asked to select the most challenging task when applying the income approach, 74.7 per cent of respondents said that estimating cash flow projections, together with their underlying assumptions, was the most difficult to do, as it requires reliable financial information and realistic projections.

The majority of executives (45.5 per cent) would play it safe by preparing multiple scenarios of possible future cash flows when faced with significant uncertainty in future cash flows, which EY said should be "realistic". That is in comparison to other approaches such as adjusting the cost of capital or preparing just a single most likely set of cash flows.

The Gordon Growth Model - an extension of the popular Dividend Growth Model - is most used to calculate terminal value due to its simplicity and allowance for company growth over time through reinvestment of retained profits.

Looking ahead, 47.1 per cent of respondents said that disruptive technology - more than any other factor - would have the biggest implication on business value and would have to be factored into the valuation process.

"More than ever, valuations will need to consider scenarios where traditional assumptions of business growth - such as build it and they will come - may need to be abandoned as technology and society are evolving faster than businesses can naturally adapt," said EY.

The study captured the views of 205 respondents over a wide range of industries including the automotive, financial services, oil and gas, insurance, and telecommunications sectors.

Speaking at the International Valuation Standards Council-Institute of Valuers and Appraisers, Singapore (IVAS-IVSC) Business Valuation Conference, Senior Minister of State for Law and Finance Indranee Rajah said that methods popular now may not accurately capture future value, necessitating a need for "continuous thought-leadership and research to improve business valuation".

Ms Indranee also highlighted the SkillsFuture Study Awards to help business valuers upskill. Aspiring business valuers could make use of the Skills Framework for the Accountancy Sector, which provides an overview of the skills needed in business valuation.

Ms Indranee spoke of the opportunities which could be found in the demand for valuation in high-tech companies, and those possessing intangible assets.

"So there is opportunity. It's just a question of building capability and readying yourselves to take advantage of this growing demand," Ms Indranee said.