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Methods of Determining Enterprise Value [19], [27], [28]



- Adjustments to the original financial data (if any);

- Basic assumptions for forming the balance sheet and income statement;

- The financial performance of the business over time and comparison with similar businesses;

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* Results of determining enterprise value;

* Scope and duration of enterprise valuation;

Methods of Determining Enterprise Value [19], [27], [28]

* Signature and confirmation: the appraiser, the person signing the valuation report is responsible for the contents performed in the report.

Third, the report on the results of determining the value of an enterprise has a different characteristic from other financial statements in that it is only prepared once at the end of the process of determining the value of an enterprise. Determining the value of an enterprise is only conducted when buying, selling, merging, dissolving, going bankrupt, or separating an enterprise, and these activities do not have to take place regularly and continuously, so the report on the results of determining the value of an enterprise is only prepared once and does not have to be prepared periodically like financial statements.

1.2.5. Methods of determining enterprise value [19], [27], [28]

To determine enterprise value, the implementing units use one of the following methods:

1.2.5.1. Asset method

* The asset method is a method of determining enterprise value based on assessing the actual value of all existing assets of the enterprise at the time of determining enterprise value.

* Basis for determining the actual value of the enterprise at the time of determining the enterprise value:

- Financial statements at the time of determining enterprise value;

- Quantity and quality of assets according to actual classified inventory;

- Technical features of the asset, usage needs and market price;



- Land use rights value, business profitability.

For financial and credit institutions, when determining enterprise value by the asset method, the results of financial statement audits are used to determine capital assets in cash, receivables, and payables, but must conduct inventory and evaluation of fixed assets, long-term investments, and land use rights values ​​according to prescribed regulations.

* Method of determining actual value:

To determine the value of assets at market price, it is necessary to first remove from the evaluation list unnecessary assets that are not capable of meeting the requirements of production and business. Then, proceed to evaluate the remaining assets according to the principle of using market price to calculate for each asset or each specific type of asset, as follows:

- For assets in kind: evaluate at market price if those assets are currently for sale on the market.

- For cash assets: determined according to the audit report, verified with the bank where the business opens an account.

- Accounts receivable: are determined based on the actual balance in the accounting books after processing.

- The value of intangible assets (if any) is determined according to the remaining value recorded in the accounting books.

- The value of long-term investment capital of the enterprise

+ For shares of those enterprises listed on the stock market, they are determined according to the stock price traded on the stock market at the time of determining the enterprise value.

+ For shares of unlisted enterprises, it is based on the determination results of the consulting agency.



1.2.5.2. Discounted cash flow method

* Discounted cash flow (DCF) method is a method of determining business value based on the business's future profitability.

* Basis for determining enterprise value:

- Financial statements of the enterprise for the 5 consecutive years prior to determining the enterprise value.

- Interest rate of 5-year government bonds at the time closest to the time of determining the enterprise value and the enterprise's cash flow discount coefficient.

- Business operation plan of the enterprise from 3 to 5 years after company conversion.

- Land use right value for the allocated land area.

* The actual value of the enterprise at the time of valuation using the discounted cash flow (DCF) method is determined as follows:

- Make long-term forecasts of cash inflows and outflows that may arise in the future such as revenue, expenses, additional investments or withdrawals during the circulation process;

- Determine the cash flow discount rate;

- Determine the present value of the net cash flow at the specified discount rate.

1.2.5.3. Quantitative method of goodwill

* This method is based on the quantitative basis of commercial advantages, the assets of the enterprise are calculated by the present value of the income generated by that asset or the present value of super profits.

* Method of determination:

Enterprise value is determined by net asset value plus intangible asset value (goodwill).



In order to determine the value of commercial advantages, the valuation unit uses the following methods:

- According to the method of the European Association of Accountants, factors such as average cost of capital, profit after tax and total asset value are used to determine the value of goodwill when determining enterprise value.

- According to the Anglo-Saxons method, parameters such as cost of equity, net profit and net asset value are re-evaluated to determine the value of goodwill.

- According to the method of regular capital needed for business, parameters such as average cost of capital for medium and long-term financing, profit after tax and regular capital financed by stable sources are used to determine goodwill.

1.2.5.4. Valuation method based on price/earnings ratio (P/E ratio)

– Price - Earning ratio)

* This method is used to determine the value of securities based on the P/E ratio and is more empirical than based on clear theoretical foundations. This method is based on the following assumptions:

- Stock prices on the market are an assessment of a business's profitability;

- Stock prices are affected by many different factors.

* Method of determination:

Enterprise value is determined on the basis of expected profit multiplied by the P/E ratio. In which, the P/E ratio is information of large companies that is regularly announced on the market, so to determine the enterprise value at the present time, it is necessary to use the P/E ratio in previous periods. However, to be able to use the P/E ratio in determining enterprise value



Whether a business is present or not on the stock market needs to be combined with many other ratios in businesses with securities traded on the market and similar production and business conditions.

1.2.5.5. Profit method

The income approach is used for special properties such as hotels, movie theaters and other properties where comparisons with similar properties would be difficult because the value depends primarily on the property's earning capacity.

The profit approach is based on an analysis of the estimated profitability of the use of the property minus reasonable operating expenses, leaving a surplus representing the actual annual income characteristic of the property. This actual income is then converted into capital. The approach of this method is to estimate the total income minus the expenses related to the production of that income and then subtract the interest on the capital that the tenant receives from their capital and some bonus to the tenant for risk. The remaining balance is the amount considered reasonable to pay for the lease. The estimated rental value is then converted into capital over many years by analyzing the revenues of similar properties.

The above methods of determining the value of a business are selected by the appraiser depending on the characteristics of each business and the purpose of determining the value of the business. Each method will give a different value of the business, so the appraiser needs to determine the appropriate method to value the business.

1.3. CHARACTERISTICS, METHODS AND AUDIT PROCESSES TO DETERMINE ENTERPRISE VALUE.

1.3.1. Characteristics of auditing to determine enterprise value [22]

Auditing to determine business value has the following basic characteristics:



Firstly, enterprise value audit is a close combination of information audit, compliance audit, efficiency audit and performance audit in the same audit.

In auditing to determine the value of an enterprise, the auditing process focuses mainly on determining the truthfulness and reasonableness of information on the value of assets, capital, receivables and payables. In addition, auditing to determine the value of an enterprise also evaluates the effectiveness, efficiency and effectiveness of the enterprise valuation process to serve interested parties. Moreover, with the specific characteristics of valuation activities in general and enterprise valuation in particular, the implementation process is strictly regulated in terms of implementation procedures, valuation methods, implementation bases, reporting forms, etc. in legal documents. In addition, the enterprise valuation activity also has specific regulations on valuation standards, specific evaluation standards that have been determined before implementation. Therefore, reviewing compliance with policies and relevant legal documents is an important issue that needs to be conducted in auditing to determine the value of the enterprise. Therefore, auditing to determine the value of the enterprise is a close combination of the above types of audits is inevitable;

Second, enterprise valuation audits are characterized by compliance audits.

In general valuation activities, enterprise valuation activities in particular have different characteristics from other fields such as to conduct valuation activities, it is necessary to follow strictly regulated work steps from the initial survey stage to the preparation and presentation of the enterprise valuation results report.



The price must always comply with the valuation standards issued by the Ministry of Finance to ensure the quality of the activity. Therefore, when performing, the auditor must grasp the regulations of this field as a basis for evaluating the business valuation activity.

Third, the content of auditing to determine enterprise value has some differences from the content of financial auditing.

The content of financial statement audit focuses mainly on the elements that make up the financial statements, which are items or financial cycles in the enterprise. Meanwhile, the content of enterprise valuation audit focuses on determining the truthfulness and reasonableness of information on enterprise value determined in accordance with the Law on Prices. At the same time, the audit conducts a review and assessment of compliance with the valuation standards issued in the process of determining enterprise value;

Fourth, auditing to determine enterprise value has a unique characteristic in that there is no concept of "next year's audit" and "going concern".

The activity of determining the value of an enterprise has the outstanding feature of being conducted only once for an enterprise and associated with each period of operation of the enterprise. Therefore, the implementation cycle does not repeat as for production and business activities and the audit of determining the value of an enterprise also only takes place in a single fiscal year. This raises the issue that auditors must always grasp the changes in the legal document system and new issues in valuation activities to be able to solve the work appropriately. In addition, during the audit of determining the value of an enterprise, the ability to continue operating of the enterprise is not assessed because if there is no merger, purchase or equitization, the enterprise will still operate under the old type of enterprise. If the enterprise conducts merger, purchase, bankruptcy or equitization activities after determining the value of the enterprise



If the enterprise is dissolved, it will operate under a new type of enterprise or will no longer exist;

Fifth, in auditing to determine the value of an enterprise, not only does it conduct research and evaluate the internal control system of the valuation unit, but it also evaluates the quality control activities of the valuation.

Since the enterprise valuation activities are mainly conducted by valuation organizations or auditing companies, the assessment of the internal control system for these units needs to be combined with the assessment of the valuation quality control activities. This combination is because these units must build a strict internal control system and must comply with the regulations in the valuation practice registration. In addition, the enterprise valuation mainly considers the compliance with the regulations of the standards, the current regime, as well as the enterprise valuation process and the basis for conducting the valuation. Therefore, auditors need to pay more attention to controlling the quality of the valuation activities of the enterprise valuation unit itself instead of assessing the internal control system of the valuation unit;

Sixth, the materiality assessment process in enterprise valuation audit also has differences with financial audit.

The activity of determining the value of an enterprise also contains many potential risks during the implementation process such as applying inappropriate valuation methods, determining incorrect valuation bases... causing distortion of the enterprise value. In addition, due to the characteristics of the enterprise value determination activity at each unit and at each different time, the assessment of materiality for each audit is also different. In addition, the results of the enterprise value determination activity provide necessary information to serve the decision making of buying, selling, merging, and dissolving enterprises of those concerned.

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