Difference Between Business Brokers and Business Valuators Valuers

“We provide what you need to know of your business, not what you want to hear”

Our guiding principle is to provide business owners with the information they need, not just what they want to hear.

While the joint goal of a broker and business owner is often finding the highest bidder, a valuator has a different objective – providing the business owner with an unbiased conclusion of value, tailored for various purposes.

Over the lifespan of a business, there arises a need for both the services of a business broker and a valuator. This strategic combination allows the business owner to benefit from a blend of objectivity and reality.

Here, we highlight some key distinctions between the two:

The Business Broker Perspective:

Small business owners turn to business brokers for assistance in valuing and selling their business. Acting as an advisor and representative, the broker aligns with the seller to achieve their common goal of locating a suitable buyer. The business broker leverages industry-specific knowledge to streamline the process, focusing on key efficiencies such as determining a listing price, defining buyer geographic scope, and establishing financial terms.

The broker’s motivation is driven by the closure of deals, as their compensation is directly tied to successful transactions. The commission becomes a pivotal factor in bringing sellers and brokers, as well as sellers and buyers, together. Efficiency is paramount for the business broker, with a quick identification of qualified buyers being the most sought-after goal.

• Objective Alignment: Brokers collaborate with business owners to facilitate the valuation and sale process, jointly aiming to identify a suitable buyer.
• Strategic Focus: Leveraging industry-specific knowledge, brokers streamline the process by determining a competitive listing price, defining buyer demographics, and establishing favorable financial terms.
• Motivation: Brokers are incentivized by closed deals, as their compensation is intricately tied to the successful execution of transactions.
• Efficiency Mandate: Time efficiency is paramount for brokers, with the rapid identification of qualified buyers being a central goal to secure an acceptable deal swiftly.

The Valuator Perspective:

Business owners seek the expertise of a valuator for an impartial conclusion of value. The valuator meticulously gathers relevant industry and company-specific data, adopting a comprehensive approach that may extend beyond the geographical limits set by a broker. While both professionals focus their efforts, the valuator ensures not to compromise on the breadth of relevant information.

A valuator’s compensation is based on the time spent completing the valuation engagement and producing a comprehensive valuation report. Importantly, the fee is not contingent on the specific conclusion of value or the identification of a qualified buyer within a set timeframe. The valuator’s objective is to present an unbiased conclusion of value in a report consistent with professional standards, providing the business owner with the information they need to hear about the business’s value, rather than what they might want to hear.

• Objective Neutrality: Valuators adopt an impartial stance, focusing on providing business owners with a meticulously derived and unbiased conclusion of the business’s value.
• Comprehensive Insight: Valuators gather industry and company-specific data comprehensively, ensuring a thorough understanding that may extend beyond the geographic limitations set by brokers.
• Compensation Structure: Valuators are remunerated based on the time invested in completing the valuation engagement and delivering a detailed valuation report.
• Objective Presentation: The valuator’s primary aim is to present an unbiased conclusion of value, offering the business owner crucial insights tailored to their specific needs.

In essence, combining the services of a business broker and a valuator ensures that a business owner receives a well-rounded perspective, facilitating informed decision-making in the complex landscape of business transactions.

Business Sale Singapore: A Roadmap to Successful Deal

Business Sale Singapore: Selling your business in Singapore is a strategic move that requires careful planning and a deep understanding of the local market dynamics. As many Singaporean business owners seek clarity on the steps involved in a successful transaction, this article aims to provide a comprehensive guide, highlighting the unique considerations for the Singapore business landscape.

From initial preparations to post-closing adjustments, we explore the crucial stages and emphasize the role of an expert business valuator throughout the journey, ensuring a smooth and proper transaction.

Building Your Team

• Local Business Valuator Valuer: Assess the true value of your business by conducting a thorough analysis of business cashflow and comparable transactions within the local market. Employ modern methodologies that align with established Singaporean valuation practices for a precise and accurate valuation.
• Beyond tax strategy, consider a Quality of Earnings report to present your company favourably, addressing potential buyer concerns early and in a manner that resonates with the local business environment.

Analysis of Financial and Operational Information

• The business valuator conducts a comprehensive analysis to understand your company’s operations, growth opportunities, and competitive advantages within the Singaporean context.
• Determine the realistic value of your business based on comparable transactions in the Singapore market, providing valuable insights for informed decision-making

EBITDA Normalization and Identification of Synergies

• Work closely with the business valuator to identify EBITDA adjustments relevant to the Singaporean business landscape, ensuring an accurate reflection of your company’s true earning potential.
• Explore potential synergies that Singapore-based strategic buyers could leverage, enhancing the overall value proposition of your business sale in the local market.

Analysis of Working Capital

• Determine the target working capital to be delivered at closing, considering local regulations that may impact negotiations and payment mechanisms.

Preparation of Marketing Materials

• Craft marketing materials, including an executive summary, NDA, Process sheet, and Confidential Information Memorandum for the business deal.

Identification and Approach of Potential Acquirers

• Research and identify potential buyers based on criteria specific to the Singapore market, considering both local and international entities with a presence in Singapore.

Preparation of Financial Data Pack and Virtual Data Room

• Simultaneously organize a financial data pack and virtual data room, ensuring compliance with local data protection regulations.

Review of Non-binding Preliminary Offers

• Engage in negotiations with potential buyers to finalize binding LOIs, ensuring terms align with local expectations.

Coordination of Due Diligence until Closing

• Facilitate due diligence, ensuring compliance with local regulations and coordination through a secure virtual data room.

Legal and Other Closing Documentation

• While legal advisors review transaction documentation, involve the legal specialist to offer business experience tailored to Singapore’s legal and regulatory framework.

Direction of Payments and Post-Closing Adjustments

• Prepare a Disbursement Schedule with consideration for Singaporean currency and banking regulations, ensuring a smooth post-closing process.

Release of Escrow

• Follow up on the release of escrow amounts, understanding Singapore’s regulatory requirements for escrow release and considering alternatives like representations and warranties insurance.

How Long Does it Take? – Typical Sale Process Timeline

Understand that there are external factors in a business sale that may influence the timeline. Based on our experience, most sale processes for small scale businesses in Singapore take approximately six to nine months to close.

For personalized assistance, contact us to initiate a dialogue and optimize your business sales with an approach customized to your business sale.

Significance of Purchase Price Allocation in Singapore

In corporate mergers and acquisitions, a critical component often overlooked in its complexity is Purchase Price Allocation (PPA). In the context of Singapore, where adherence to financial regulations and market intricacies is paramount, comprehending the necessity of PPA holds strategic importance for both management and investors.

Adherence to accounting standards, including Singapore Financial Reporting Standards (SFRS), underscores the commitment to regulatory compliance and financial transparency.

Investors in the Singaporean market prioritize precision in financial reporting. PPA serves as a conduit for a detailed understanding of a transaction’s implications, providing insights into its potential impact on metrics such as earnings per share. While management often concentrates on operational integration, investors seek a nuanced comprehension of the financial health and future prospects of the acquired company. By delving into the intricacies of how the purchase price is allocated, both management and investors gain valuable insights into the strengths, weaknesses, potential areas of growth, and associated risks of the target company.

Intangible Assets Valuation

A substantive aspect of PPA involves the identification and valuation of intangible assets, a process known for its inherent complexity. In the context of Singaporean businesses, intangible assets such as customer relationships, patents, trademarks, and non-compete agreements assume significant value. The resulting goodwill, occasionally presenting as a negative figure, introduces an additional layer of intricacy to the PPA process.

Role of PPA Specialists in Valuation

The valuation of intangible assets demands a sophisticated approach, given the subjective nature of their identification and valuation. In the context of the Singaporean market, the expertise of valuators becomes critical, encompassing their understanding of the PPA process, familiarity with business processes and the local environment, and a nuanced knowledge of the financial market. Valuators must carefully select the appropriate valuation method—whether it be the income approach, market approach, or cost approach—considering the specificities of the Singaporean market.

Navigating Challenges: Intellectual Property and Beyond

In the Singaporean business landscape, where certain assets may lack market comparables, such as intellectual property assets like patents and software, the valuator’s expertise becomes vital. Similarly, valuing brand value or customer relationships can be challenging due to the unique characteristics of the acquired company, such as a lack of relevant historical information.

PPA Specialists for Accuracy

PPA specialists play a pivotal role in assisting companies in Singapore in accurately valuing acquired entities. They aid in identifying potential risks and opportunities, ensuring compliance with accounting and tax regulations, and facilitating discussions with auditor specialists. Their expertise adds a layer of confidence to the PPA process, helping businesses make informed decisions in the dynamic landscape of mergers and acquisitions.

As businesses in Singapore navigate the intricate world of acquisitions, recognizing the significance of Purchase Price Allocation goes beyond regulatory compliance. It becomes a strategic tool for both management and investors, unlocking a deeper understanding of the financial implications, risks, and opportunities embedded in the acquired entity.

In Singapore, goodwill is valued and accounted for in accordance with the Singapore Financial Reporting Standards (SFRS). The SFRS 38 outlines the principles and methods for accounting and valuing goodwill.

Under SFRS 38, goodwill is considered an intangible asset and is recorded on the balance sheet at its cost or fair value, whichever is applicable. Goodwill is typically generated when a company acquires another business for more than its net identifiable assets, and represents the premium paid for the acquired company’s reputation, brand recognition, customer loyalty, and other intangible assets.

We reiterate that goodwill is typically only valued when there is a business acquisition, as it represents the premium paid for the intangible assets of the acquired company. However, there are certain circumstances where a company may have goodwill without an acquisition.

Goodwill without an acquisition/transaction

For example, a company may generate goodwill through its own brand recognition and customer loyalty over time. This can occur when a company has been in business for a significant period of time and has built a strong reputation and customer base. In this case, the company would record the goodwill on its balance sheet as an intangible asset.

Another example of generating goodwill without an acquisition can occur when a company invests in research and development to create new products or services that are well-received by customers. This can create goodwill as customers become loyal to the company’s brand based on the quality and innovation of its products or services.

In both of these cases, the value of goodwill would need to be determined through one of the methods outlined in SFRS 38, such as the income approach or the cost approach. Once the value of goodwill has been determined, it would be recorded on the balance sheet and amortized over its useful life.

Methods to value Goodwill in Singapore

To value goodwill in a business under SFRS 38, there are several methods that can be used:

1. Market Approach: This method involves looking at the market value of similar businesses to determine the value of the goodwill in the business.
2. Income Approach: This method involves estimating the future cash flows of the business and discounting them back to their present value using a discount rate. The value of the tangible assets is then subtracted from this figure to determine the value of goodwill.
3. Cost Approach: This method involves estimating the cost of recreating the business’s intangible assets, such as its brand and reputation, and using that figure as the value of goodwill.

Once the value of goodwill has been determined, it is recorded on the balance sheet and amortized over its useful life. The useful life of goodwill can vary depending on the specific circumstances of the business, but is typically between 5 and 20 years.

It is important to note that the value of goodwill can fluctuate over time and may need to be reassessed regularly to ensure that it is being accurately reflected on the balance sheet. Additionally, if there is an impairment in the value of goodwill, it must be recognized on the income statement as an expense.

Case study:

Goodwill is often generated when a company acquires another business for more than the net tangible assets of the acquired business. This can occur for a variety of reasons, such as acquiring a well-known brand or intellectual property, acquiring a customer base, or gaining access to new markets.

For example, imagine a Singapore-based company that specializes in manufacturing sports equipment. The company has been doing well and is looking to expand its operations. They identify a smaller competitor that is struggling financially but has a well-known brand and a loyal customer base. The larger company decides to acquire the smaller company for more than the value of its tangible assets, in order to gain access to its intangible assets, such as its brand and customer base.

In this scenario, the larger company would record the excess amount paid for the smaller company as goodwill on its balance sheet. This represents the premium that the larger company paid for the intangible assets of the smaller company, such as its brand, reputation, and customer base.

Summary

Overall, while goodwill is most commonly associated with business acquisitions, it is possible for companies to generate goodwill through their own efforts and investments in building their brands and developing innovative products or services.

Goodwill can be a significant asset for a company, and can contribute to its overall value. However, it can also be a potential liability if the value of the intangible assets associated with the goodwill diminishes over time, or if the company overpaid for the acquired business.

As such, it is important for companies to carefully consider the value of the intangible assets associated with an acquisition and to conduct due diligence to ensure that they are paying a fair price for the business. It is also important to regularly reassess the value of goodwill and to adjust the amortization period accordingly to ensure that it is being accurately reflected on the balance sheet.

Find out how to value goodwill in your business.

In valuation, the discount rate refers to the rate of return used to determine the present value of future cash flows. It’s also known as the required rate of return or the opportunity cost of capital.

The discount rate takes into account the risk associated with an investment or asset, as well as the time value of money. It is essentially the rate of return that an investor would require to invest in a particular asset, taking into account the risk and time horizon of the investment.

The choice of discount rate is critical in valuation, as it can significantly impact the calculated value of an asset or investment. A higher discount rate will result in a lower present value of future cash flows, while a lower discount rate will result in a higher present value of future cash flows. As such, it’s important to choose an appropriate discount rate that accurately reflects the risk and time horizon of the investment.

The discount rate is often calculated using the WACC (Weighted Average Cost of Capital), which takes into account both the cost of debt and equity financing for a company. Other methods for determining the discount rate include the CAPM (Capital Asset Pricing Model) and the Fama-French Three Factor Model.

Correct application of discount rate

It is worth noting that the discount rate is not a fixed value, and can vary depending on various factors such as changes in the risk profile of an investment, changes in market conditions, and changes in the economic environment. As such, it’s important for investors and analysts to regularly reassess their discount rates to ensure that they are accurately reflecting the current risk and opportunity cost of capital.

Another important consideration when choosing a discount rate is the type of investment being evaluated. For example, a venture capital investment may require a higher discount rate than a publicly traded company, due to the higher risk associated with investing in a startup or early-stage company.

Ultimately, the discount rate is a key input in the valuation of assets and investments, and plays a critical role in determining the present value of future cash flows. As such, it’s important to carefully consider and choose an appropriate discount rate that accurately reflects the risk and time horizon of the investment, and to regularly reassess and update the discount rate as circumstances change.

Case study:

Let’s say you’re a business owner considering an investment in a new project. To determine the value of the project, you need to estimate the future cash flows that the project is expected to generate, and then discount those cash flows back to their present value using a discount rate.

The discount rate in this case would take into account the risk associated with the project, such as market risk, operational risk, and financial risk. It would also take into account the opportunity cost of capital, which is the return that investors could expect to earn on a similar investment of similar risk.

For instance, let’s say that the project has an estimated future cash flow of SGD 1 million per year for the next 5 years. To determine the present value of these cash flows, you would use a discount rate that reflects the risk and time horizon of the project.

If you estimate that the appropriate discount rate for this project is 10%, then the present value of the future cash flows would be calculated as:

Present Value = (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + … + (CF5 / (1 + r)^5) = (1,000,000 / (1 + 0.10)^1) + (1,000,000 / (1 + 0.10)^2) + … + (1,000,000 / (1 + 0.10)^5) = SGD 3.791 million

In this example, if the cost of the project is less than SGD 3.791 million, then it may be a good investment for the business. However, if the cost of the project is more than SGD 3.791 million, then it may not be a good investment.

Summary

As you can see, the choice of discount rate is critical in determining the present value of future cash flows, and ultimately in making investment decisions. It’s important to choose an appropriate discount rate that accurately reflects the risk and time horizon of the investment, and to reassess the discount rate regularly as circumstances change.