Exit Planning and Its Implications: Business Valuation In Singapore
The exit planning process aims to maximise the value of a business through working out a baseline, and then analysing the business to justify its valuation multiple that is lower than the Singapore industry’s average.
Business Valuation Must Happen At The Start Of An Exit Planning Process:
A business owner who knows the real value of his/her business in Singapore can surely make strategic decisions that generate long-term value for the business.
An accurate business analysis and an updated business valuation can help accomplish the following objectives:
● Allows the business owner to plan for tax implications in Singapore of various exit options and sales structures;
● Forms a basis for determining the ‘wealth gap’, which is the difference between the requirements for achieving the business owner’s future goals and the current sale proceeds;
● Allows the business owner an alternative tracking method for the progress of the business;
● Gives a baseline for judging the effectiveness of the exit planning strategy.
In cases where the multiple valuation is different from the top comparable transactions across Singapore, the valuation process would have the business owner and the consultants overturning rocks and scrutinising the business’s financial nature. This then surfaces important information and opportunities that help maximise the business value.
Maximising The Business Value
Generally, business valuations are driven by the business’s income, growth and risks; and a business owner can manage and adjust these main components to maximise the value of his/her business.
For example, as the income component relates to the past earnings and their expected recurring rate in the future, a business owner need only to evaluate their business and consider questions like:
● What are the drivers of the income?
● How to sustain and/or increase the flow of income?
● Is the income at risk for a loss? How to overcome it, if it was so?
1. Controlling Business Income
The First Consideration To Controlling A Business Income Is The Customers:
A flourishing business has a diverse customer base that has no concentration or reputation issues. It is hence vital to determine the degree of ‘customer loyalty’ to the existing ownership or leadership, in case of a change. The greater value in business happens when customers are more entangled with the proprietary of the business products and services, the market knowledge, and the agreements and contracts.
The Second Consideration To Controlling A Business Income Is The Structural Capital:-
This is in the context of technology and processes; and the objective is to create a reliable sustained cash flow.
2. Controlling Growth
The Main Driving Factors Of Growth Are The Human And Structural Capital:
Firstly, human capital - also known as the ‘social capital’ - refers to the staff behind the business. So business owners need to ask themselves the following questions:
● Have they allocated the right people for the right tasks?
● Is the team adequately trained to carry out specific tasks?
● Is there regular adequate supervision to ensure quality carrying out of the tasks?
● Is there sufficient incentives to motivate the team’s achievement of the business’s growth targets?
Next, structural capital refers to the system of procedures and processes put in place to facilitate the team to achieve the growth targets. Again, some of the relevant questions to consider are as follows:
● Is there a system in place that drives growth? Or hinders it?
● Is the business scalable? If so, are there resources (i.e. technology) in place to facilitate it?
● Is there a regular and proper procedure of documentation that is easy to follow and sustainable?
3. Controlling Risks
This Means Considering All Possible Risks And Putting In Place Adequate Internal Control:
To do so, a business owner needs to know all the dangers in the business and the viable options to mitigate these dangers. Then, the right controls must be in place, regardless of the size of the business, which would involve having a steady and consistent management team who is as motivated to move the business to the next level.
Next is insurance and planning. It is quite impossible to foresee a natural disaster but a business owner must be able to make contingency plans for its possible impact in Singapore. He/she must also be able to sense a danger or an event that threatens the business’s income or growth, and then plan for the impending risks.
The value of the driving components of a business valuation decides on the overall value of a business - whether it is above or below, or equal to the industry standards. Hence with the right planning and control of these drivers, a business can be sold at an outrageous price.
Since the overall market value is dictated by the sale metrics of comparable companies, the same way a house value is driven by comparable house sales, it is understood that a business owner has little or no control over the Singapore market conditions. Other than that, he/she has control over all the relevant components of a business valuation.
Business valuation should then be the first step of exit planning because it allows a better understanding of the present status for a clearer direction of a strategy.
A business owner who does not take business valuation seriously will significantly hamper his/her ability for an effective succession planning. He/she could even end up with a non-saleable business or a transaction that is valued less than the expected rate or even the market rate.
Unsure of what to do next for your business sale? Speak with us first.