As the economic outlook turns a shade brighter, small and medium-sized enterprises (SMEs) are increasingly more optimistic about their business prospects. Some firms may be thinking about expansion or acquiring new equipment. At this juncture, it is critical that they have a good handle on the value of their assets, especially when they have manufacturing operations in different locations.
Valuation provides a scientific and consistent assessment of assets across a company’s geographies, and allows SMEs to understand and unleash the true value of their assets. It is a technique that accurately describes and prescribes a market value which is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction. This is arrived at after proper marketing and where the parties had each acted knowledgeably and prudently; and this should be distinguished from planned depreciation (accounting depreciation), where the recorded decline in the cost of an asset is tied to its business life.
Assets such as plant and machinery – when combined with other items including industrial infrastructure, utilities, building services installations and specialized buildings – form a dedicated assemblage in a manufacturing operation.
When asset valuation is required
There are many situations where SMEs require asset valuation to be conducted. Among them: mergers and acquisitions, liquidation, financial reporting, financing, transfer of assets, impairment, mediation support and obtaining a second opinion. It could also simply be to understand the market value of the company’s capital assets so as to make an informed business decision.
Nowadays, there is a strong emphasis on internal controls and governance under standards established by the International Valuation Standards Council (IVSC), the Royal Institute of Chartered Surveyors (RICS), the Institute of Valuers and Appraisers of Singapore (IVAS), International Financial Reporting Standards (IFRS) and others. As a result of the guidelines set by the various standards boards, there is growing demand by companies to conduct valuations and to understand the value of their assets that reside in their manufacturing facilities.
It is never too early to conduct a valuation as it is one of the best practices that provides an independent value of the capital assets to investors, shareholders, financial institutions, funders, regulators and others. The valuation, in turn, allows management and other decision makers to make informed decisions that will create an environment of trust for the target company that is being valued.
Potential investors or existing shareholders also want to be better informed of what they are investing in. Valuations conducted at regular intervals provide them with a good insight of the value and condition of the assets. From valuations, they can ascertain the quality of operations management. The valuations also enable them to plan ahead or make certain decisions to improve the overall management or business strategy.
Before an SME rushes into conducting a valuation, it is important to determine the purpose of a valuation. Indeed, it is the first step that an organisation should consider, and it should be articulated clearly to the valuer.
The valuation’s purpose must also be discussed with various stakeholders, such as shareholders, board of directors, accountants and audit committee (if any), before instructions are provided to the valuer.
Once the purpose is clearly defined and communicated to the valuer, the valuer will then discuss and advise on suitable and relevant methodologies and approaches for the exercise. The organisation’s finance team will provide a detailed asset listing that reconciles with the financial statements and management accounts for the valuer to determine the coverage and time frame to complete the entire valuation.
The more detailed the information the valuer receives, the better it would be, as this would save time during the valuation process and asset inspection. When a valuer is asked to undertake a valuation on the basis of limited information, the nature of the limitation must be agreed upon. The valuation implications of the limitation have to be confirmed in writing to the client, before the valuation results are reported.