Business valuation is a process involving technical procedures used to estimate the economic value of an owner’s interest in a business. Business valuation is used by financial market participants to determine the value they are willing to pay or receive to affect a sale of a business. In addition to estimating the sale value of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders’ deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.
In Malaysia where Business Valuation is still a very new field, Property Times Malaysia visited Dato’ Sr Lau Wai Seang, to understand more about the intricacies of Business and Intellectual Property Valuation at the local arena.
The opinion below is purely Dato’ Sr Lau Wai Seang’s and does not represent the opinion of the Royal Institution of Surveyors Malaysia (RISM)’s or Asia Pacific Centre of Economic Diplomacy (APCED)’s views.
1) What is Business Valuation?
Dato’ Sr Lau: In the west, especially in USA, business valuation gained momentum in the late 19th century when the government started to levy taxes upon the disposal of businesses or upon the death of business owners. Thereafter business disputes, and even divorce cases, intensified the need of value determination of businesses. Besides the purposes stated earlier, business valuations are performed for so many other reasons; for instance, for M&A, compensation in the event of litigations, financial decisions such as the reorganization of a business set-up, financing of a business venture, and purposes such as a donation, gifts or estate distributions. Today, business valuation is a field professed by business valuers who apply historical data, academic models and financial data from reliable sources and analyse this information to conclude on the value of a business.
2) What are the fundamentals or best practices of Business Valuation in Malaysia?
Dato’ Sr Lau: Unlike in USA or Europe, business valuation in Malaysia is largely carried out by the accountants. As such the fundamentals of valuations are tied up with financial standards.
However, business valuation is more than financial analysis. That is why in Europe and USA, there are professionals called business valuators or appraisers who specialise in valuing businesses. Locally, this profession is fairly in its development stage. The participants are largely the real estate valuers.
In carrying out business valuations in Malaysia, even though there are no specific guidelines, references may be made to financial standards, valuation standards as well as guidelines produced by international professional bodies such as RICS (Royal Institution of Chartered Surveyors), IVSC (International Valuation Standards Committee) or the GAAP (Generally Accepted Accounting Procedures) in USA.
It must be pointed out that a business has 3 types of assets, namely the monetary asset, the tangible assets and the intangible assets. The values of the first 2 types of assets are easily determinable. The intangible assets though, call for some expertise in its value determination.
There again are several types of intangible assets of which the Intellectual Property (IP) is the most recognisable.
This being the case, I reckon guidelines or best practices developed should focus along the line of IP valuations.
For this, RICS has in recent years come about with some good guidelines. MyIPO (Malaysian Intellectual Property Corporation) has also developed some basic guidance notes on IP valuations.
The Royal Institution of Malaysia (RISM) too is developing best practices guidelines on the valuations of intangible assets.
3) Can a Business Valuation be used as a collateral for securing a loan?
Dato’ Sr Lau: The answer is Yes and No.
An established business as one can see is able to secure loans from financial institutions, based largely on the its ability to generate revenues from its assets, which will comprise the monetary asset, maybe some tangible assets and unknowingly some intangible assets.
A start-up is not viewed favourably by the financial institutions as it does not have a track record of making money. The good news though is that there are high risk appetite institutions which will help a new business financially. Other ways of securing fund for the start-ups will be to form partnerships with established companies or to obtain grants from governmental institutions.
On the flipside, it is sad to observe that the smaller industry players are unaware that their businesses are capable of being monetised based not on the traditional asset groups of money and tangible assets but also the intangible assets.
Locally, this financial revenue should be highlighted especially to the SMEs.
4) Is it crucial that the business valuation practice be regulated? What are the opportunity costs if it is not?
Dato’ Sr Lau: In the established economies, regulatory requirements are minimal. I believe this is the way forward in Malaysia for the business valuation profession.
The absence of professional competency though will be at the expense of the clients and the image of a country. This calls for integrity among the practitioners.
Early valuations of business were more of an art but had since the 21st century gained a scientific aspect to its value determination. But the business environment is ever-changing with the coming on-board of new types of business assets, seamless economy, new market frontiers, the present valuation approaches and methods will need to also be ever improved.
Skills must be complemented with an ever-improved knowledge. A professional body or bodies to see to the development of such knowledge and skill enhancement and the upscaling of competency will be vital.
That is about the supply side of business valuers.
On the demand side, there is an absence of concerted effort to make known this profession of business valuation to the business sector in this country. Related professional bodies such as Royal Institution of Surveyors Malaysia is willing to fill in this gap.
About Dato’ Sr Lau Wai Seang
DSPN, DJN, BCN, FRISM, Registered Valuer, CIPV
President, Royal Institution of Surveyors Malaysia (RISM)
Regional President of Asia, Commonwealth Association of Surveying and Land Economy (CASLE)
Dato’ Sr Lau Wai Seang is a Fellow of RISM. She is an International Certified Valuation Specialist, IACVA (International Association of Consultants, Valuators and Analysists), USA; a Certified Intellectual Property Valuer (CIPV), a joint certification by MyIPO (Malaysian Intellectual Property Corporation) and World Trade Institute, University of Berne, Switzerland; and a Registered Valuer and Registered Estate Agent, both registrations are from the Board of Valuers, Appraisers and Estate Agents, Malaysia. Her academic qualifications include a Bachelor of Survey (Property Management), University of Technology Malaysia and an MBA (Real Estate), University of Western Sydney, Australia. She retired from the Valuation and Property Services Department (JPPH), Ministry of Finance, Malaysia after her posting as the Director of Valuation Services Division at the HQ of JPPH, Putrajaya. She completed a publication entitled Glossary of Keywords for IP Valuation, JPPH before her civil service retirement. Her experience on the real estate realm had progressed onto that of Business Valuation and Intellectual Property Valuation. Currently she is the Head of Valuation, Asia Pacific Centre of Economic Diplomacy (APCED), an agency in the consultancy service of Intellectual Property and International Diplomacy.
Over the years, Dato’ Sr Lau had presented many papers and chaired various sessions, both locally and on an international platform.