How Is Enterprise Value Determined During Equitization?

As part of the economic restructuring process, enterprise equitization is considered one of the key solutions for improving operational efficiency, enhancing management transparency, and attracting capital from the private sector. For state-owned enterprises, equitization is not only a requirement of the reform process but also an opportunity to strengthen competitiveness, access financial resources, and expand business operations.

However, accurately determining enterprise value plays a particularly important role in ensuring successful equitization. Even a minor valuation discrepancy can affect the interests of the State, investors, and the enterprise itself after the conversion.

What Is Equitization?

Equitization is the process of converting an enterprise from a concentrated ownership structure into a joint-stock company by issuing shares to organizations, individuals, and investors.

For state-owned enterprises, equitization involves converting part or all of the States capital in the enterprise into share capital, enabling various economic sectors to participate in the ownership and management of the business.

The main objectives of equitization include:

• Improving corporate governance efficiency.

• Increasing capital-raising capacity.

• Attracting strategic investors.

• Enhancing operational transparency.

• Strengthening market competitiveness.

• Optimizing the use of State resources.

Why Should Enterprises Undergo Equitization?

Equitization offers enterprises several practical benefits:

• Increasing capital-raising capacity: Enterprises can raise substantial capital from domestic and foreign investors through share issuance.

• Improving corporate governance: The joint-stock company model requires greater transparency in management, financial operations, and information disclosure.

• Attracting strategic investors: Strategic investors can contribute capital, technology, management expertise, customer networks, and distribution channels.

• Increasing enterprise value: When effectively restructured, an enterprise can improve its financial capacity and market value.

Current Forms of Equitization

Depending on each enterprises strategic direction and capital structure, equitization may be carried out in the following forms:

• Maintaining existing State capital and issuing additional shares: The enterprise issues additional shares to increase its charter capital while the State retains its existing capital contribution.

• Selling part of the States capital: The State transfers part of its ownership stake to investors.

• Selling all State capital: The State divests its entire ownership stake, and the enterprise operates entirely under the joint-stock company model.

• Combining State capital divestment with additional share issuance: This is a common approach that allows the enterprise to attract new capital while restructuring its ownership.

The Enterprise Equitization Process

The equitization process typically involves several important steps.

Step 1 – Establishing the Equitization Steering Committee: The enterprise establishes a dedicated team to implement the equitization plan.

Step 2 – Asset Inventory: All enterprise assets are reviewed and inventoried, including:

• Real estate.

• Machinery and equipment.

• Transportation vehicles.

• Inventories.

• Financial assets.

• Intangible assets.

Step 3 – Financial Settlement: The enterprise undertakes the following activities:

• Reconciling receivables and payables.

• Resolving outstanding debts.

• Reviewing tax obligations.

• Completing legal documentation.

Step 4 – Determining Enterprise Value: This is the most important step in the entire equitization process. The valuation results serve as the basis for:

• Determining the initial offering price.

• Determining charter capital.

• Allocating ownership percentages.

• Protecting the interests of relevant stakeholders.

Step 5 – Developing the Equitization Plan: The enterprise prepares an equitization plan and submits it to the competent authority for approval.

Step 6 – Conducting the Share Sale: Shares are sold through public auctions or to investors in accordance with applicable regulations.

Step 7 – Converting into a Joint-Stock Company: The enterprise completes the procedures required to register its operations under the joint-stock company model.

Methods for Determining Enterprise Value During Equitization

Enterprise valuation must comply with current regulations and the Vietnam Valuation Standards.

Depending on the type of enterprise, the valuation organization may apply one method or combine multiple methods.

Asset-Based Approach

This is one of the most commonly used methods in enterprise equitization.

Enterprise value is determined based on:

Actual value of assets
minus
Total liabilities.

This method is suitable for:

• Manufacturing enterprises.

• Enterprises with substantial fixed assets.

• Enterprises holding large land reserves.

Income Approach

Enterprise value is determined based on its ability to generate future income.

This method is commonly applied to:

• Service enterprises.

• Enterprises with strong brands.

• Enterprises with stable cash flows.

Market Approach

This approach compares the enterprise with comparable businesses operating in the market.

Commonly used indicators include:

• P/E.

• EV/EBITDA.

• P/B.

Combined Approach

In many cases, it is necessary to combine:

• The asset-based approach.

• The income approach.

• The market approach.

This helps provide a more comprehensive reflection of the enterprises actual value.

Assets That Need to Be Valued During Equitization

To accurately determine enterprise value, the following asset categories must be comprehensively assessed:

Real Estate

• Land used for production and business activities.

• Factories.

• Office buildings.

• Warehouses and storage facilities.

Machinery and Equipment

• Production lines.

• Industrial equipment.

• Specialized equipment.

Transportation Vehicles

• Cars and other motor vehicles.

• Ships and boats.

• Transportation equipment.

Financial Assets

• Investments.

• Equity contributions.

• Bonds.

Intangible Assets

• Brands.

• Intellectual property rights.

• Software.

• Technological know-how.

• Exploitation and operating licenses.

Risks of Incorrect Enterprise Valuation

Inaccurate enterprise valuation can lead to several serious consequences.

Undervaluation:

• Loss of State capital.

• Losses to existing shareholders.

• Sale of assets below their actual value.

Overvaluation:

• Difficulty attracting investors.

• Failed initial public offerings (IPOs).

• Prolonged equitization processes.

Asset Valuation Discrepancies:

• Disputes arising between relevant parties.

• Adjustments resulting from inspections or audits.

• Damage to the enterprises reputation.

Indochina International Appraisal – Supporting Enterprises Throughout the Equitization Process

During equitization, accurately determining enterprise value is essential to protecting the interests of the State, the enterprise, and investors. It also provides a basis for developing the equitization plan, determining the initial offering price when issuing shares, and minimizing potential legal risks in the future.

As a specialized provider of enterprise valuation services, Indochina International Appraisal offers enterprise valuation services for:

• Equitization of state-owned enterprises.

• Conversion of enterprise ownership and business models.

• IPOs and stock exchange listings.

• Mergers and acquisitions (M&A).

• State capital divestment.

• Corporate restructuring.

• Valuation of shares and equity contributions.

• Asset valuation for capital raising and investment purposes.

The valuation process is conducted by a team of qualified valuers with professional expertise and practical experience. Their work includes on-site asset inspections, market data collection, financial analysis, and the determination of tangible asset values, intangible asset values, and overall enterprise value using methods appropriate to current regulations.

Leveraging a cross-sector market database, a multi-level quality control process, and comprehensive application of the Vietnam Valuation Standards, Indochina International Appraisal delivers reliable valuation reports and certificates that meet the requirements of state management agencies, credit institutions, investors, and other stakeholders throughout the enterprise equitization process.

Indochina International Appraisal is committed to supporting enterprises in accurately determining value, enhancing transparency, and optimizing the effectiveness of the equitization process.

Do not let an inaccurate enterprise valuation compromise your equitization process. Contact Indochina International Appraisal today for professional valuation advice and services.

Indochina International Appraisal & Investment JSC (SunValue)

• Address: Indochina International Appraisal System

• Hotline/Zalo: 081 519 8877

• Email: contact@sunvalue.vn

• Facebook: Indochina International Investment & Appraisal

• Website: inavn.vn

Conclusion

Equitization is a significant process for both enterprise development and the broader economy. Its success depends largely on accurately determining enterprise value and the value of related assets. Therefore, selecting a reputable valuation firm with strong professional expertise and a thorough understanding of applicable legal regulations is essential for ensuring transparency, optimizing enterprise value, and effectively attracting investment capital during the transition.