06 current business valuation methods in Vietnam

Hi, Lawnet would like to answer as follows:

1. What is business valuation?

According to the provisions of Clause 10, Article 4 of the Law on Enterprises 2020, enterprise means an organization that has a proper name, assets, premises, is established or registered in accordance with law for business purposes.

Business valuation can be understood as the process of determining the value of a business at a certain time. Business value is the value of all assets, ownership, and business advantages of that business.

2. 06 current business valuation methods in Vietnam

Below are 06 current business valuation methods

(1) Mean ratio method

- The mean ratio method is used for estimating the equity value of the business to be valued through the average market ratio of the comparable business.

The comparable business is the business that satisfies the following conditions:

+ They are similar to the business to be valued in terms of the following factors: main business activities; business risk, financial risk; financial indicators.

+ There is information about the price of share that has been successfully traded on the market at the time of valuation or near the time of valuation but within 01 year till the time of valuation. Market ratios considered for use in the average ratio method include: price-to-earnings ratio (), price-to-sales ratio (), price-to-book value of equity ), ratio of equity value to earnings before interest, tax, depreciation or amortization (), equity value-to-sales ratio ().

- Cases of application of the mean ratio method

There must be at least 03 comparable businesses. Priority should be given to comparable companies that are listed on stock exchanges or registered for trading on UPCoM.

- Calculation principles

+ The formulas used for calculating financial ratios and market ratios should be consistently applied to all comparable businesses and businesses to be valued.

+ Financial indicators, market ratios of comparable businesses collected from different sources must be reviewed and adjusted to ensure consistency in the applied formulas before they are put to use in the valuation process.

- Steps in calculating the business’s equity value

+ Step 1: Evaluating and selecting comparable businesses.

+ Step 2: Determining market ratios used for estimating value of the business to be valued.

+ Step 3: Estimating value of equity of the business to be valued on the basis of market ratios appropriate for use and correcting dissimilarities.

(2) Transaction value method

- The transaction value method helps estimate the equity value of the business to be valued through the price of the successful transfer of contributed capital or shares on the market of that business.

- Cases of application of the transaction value method

The business to be valued have at least 03 successful transfers of contributed capital or shares in the market; at the same time, the time of the transaction is not more than 01 year preceding the time of valuation.

- Principles of application

The valuer should evaluate and consider adjusting the prices of successful transactions to suit the valuation time if necessary.

- Estimating equity value:

The equity value of the business to be valued is calculated by the average price determined according to the transaction volume of at least 03 successful transfers of contributed capital or shares performed at the time closest to the time of valuation.

In case where the business to be valued is an enterprise that has listed their shares on the stock exchange or registered for trading on UPCoM, the share price used for calculating the equity market price is the transaction price, or the closing price of the shares of the business to be valued at or near the time of valuation and trades in these shares must be performed within 30 days before the time of valuation.

(3) Asset-based method

- The asset-based method is a method of estimating the value of the business to be valued by calculating the total value of the assets under the ownership and at the disposal of the business to be valued.

The valuation of a state-owned enterprise and single-member limited liability company in which 100% charter capital is held by the state-owned enterprise for transformation into a joint-stock company by employing the asset-based method shall be applied in accordance with the provisions of legislation on equitization.

- Calculation principles:

+ Assets considered in the valuation process are all assets of the business, including both operating and non-operating assets.

+ The Director (General Director) of the business to be valued should cooperate in carrying out the inventorying and classification of assets under the ownership, custody or at the disposal of that business (including property rights) together with documents proving the rights to own and use assets for valuation purposes; at the same time, assisting the valuer in conducting the survey of the current state of the business's assets. In case where the valuer is not fully provided with the aforesaid information and documents, or support for the survey of the current state of the assets, the valuer can evaluate and consider making assumptions (if necessary); also, include these limitations in the qualified opinion and limitation section of the valuation certificate and valuation report.

+ When valuing a business on the basis of market value, the value of the business's assets is the market value of these assets at the time of valuation. Assets in the accounting books need to be appraised at the right market value. In some special cases, the instructions at Point 5.4 of the Vietnamese valuation standard no. 12 issued together with Circular 28/2021/TT-BTC may be followed.

+ Intangible assets that do not satisfy the conditions to be recorded in the accounting books (e.g. trade names, trademarks, inventions, industrial designs,...) and other assets that are not recorded in the accounting books should be calculated by applying the appropriate valuation method.

+ For assets accounted for in foreign currency: Foreign exchange rates apply according to the instructions given in Vietnamese Accounting Standards during the process of preparation and presentation of financial statements.

- Calculation steps

+ Step 1: Estimating total value of tangible assets and financial assets of the business to be valued.

+ Step 2: Estimating total value of intangible assets of the business to be valued.

+ Step 3: Estimating the equity value of the business to be valued.

(4) Discounted free cash flow method

- The discounted free cash flow method helps determine the value of the business to be valued by estimating the sum of the discounted free cash flows of the business to be valued and the present value of non-operating assets of the business at the time of valuation. In case where the business to be valued is a joint stock company, the discounted free cash flow method of the business is used with assumption that the preferred shares of the business to be valued are treated as common shares. This assumption should be clearly stated in the limitation section of the Valuation Deed and the Report on valuation results.

- Steps in calculating the business’s equity value:

+ Step 1: Forecasting free cash flows of the business to be valued.

+ Step 2: Estimating the weighted average cost of capital of the business to be valued.

+ Step 3: Estimating the equity value at the end of the forecast period.

+ Step 4: Estimating the equity value of the business to be valued.

(5) Discounted dividend stream method

- The discounted dividend stream method determines the equity value of the business to be valued by estimating total value of the discounted value of the dividend stream of the business to be valued. In case where the business to be valued is a joint stock company, the discounted dividend stream method of the business is used with assumption that the preferred shares of the business to be valued are treated as common shares. This assumption should be clearly stated in the limitation section of the Valuation Deed and the Report on valuation results.

- Steps in calculating the equity value

+ Step 1: Forecasting the dividend stream of the business to be valued

The valuer needs to forecast the dividend payout rate and the dividend growth rate of the business to be valued. In order to estimate the dividend stream forecast period, the valuer should refer to the characteristics of the business, business lines and economic contexts to select appropriate growth models. Minimum dividend stream forecast period is 03 years. In case of newly established or fast-growing businesses, the dividend stream forecast period can be extended until each business enters a phase of steady growth. For businesses operating within a definite term, the dividend stream forecast period is determined according to the age of the business.

+ Step 2: Estimating the cost of equity according to the instructions given in 6.4 of the Vietnamese valuation standard no. 12 issued together with Circular 28/2021/TT-BTC.

+ Step 3: Estimating the equity value at end of the forecast period

+ Step 4: Estimating the equity value of the business to be valued

(6) Discounted free cash flow to equity method

- The discounted free cash flow to equity method determines the equity value of the business to be valued by estimating the sum of the discounted free cash flow to equity of the business to be valued. In case where the business to be valued is a joint stock company, the discounted free cash flow to equity method of the business is used with assumption that the preferred shares of the business to be valued are treated as common shares. This assumption should be clearly stated in the limitation section of the Valuation Deed and the Report on valuation results.

- Steps in calculating the equity value

+ Step 1: Forecasting free cash flows to equity of the business to be valued.

+ Step 2: Estimating the cost of equity of the business to be valued according to the instructions given in d, 6.4 of the Vietnamese valuation standard no. 12 issued together with Circular 28/2021/TT-BTC.

+ Step 3: Estimating the equity value at end of the forecast period

+ Step 4: Estimating the equity value of the business to be valued

(Pursuant to Vietnam Valuation Standards No. 12 issued with Circular 28/2021/TT-BTC)

Best regards!

Please Login to be able to download