WHY APPRAISAL IMPORTANT WITH THE FOREIGN INVESTOR?

With the great attractiveness of the Vietnamese market, many foreign investors will continue to look for opportunities here. While some sectors have been permitted by the government to hold up to 100% of the shares compared to only 49% as before, the lack of specific guidance on areas is restricted or open to the public. also confusing investors. In fact, investors should note that the 49% ceiling still applies to many “conditional” investment sectors with foreign investments. On the other hand, this ratio remains at a maximum of 30% for industries that are bound by other ownership regulations, typically banks.

Before deciding to invest in Vietnam, foreign enterprises must not only understand the legal regulations but also have to answer difficult questions such as: How to know the true value of the business in country? Why is that important? Perhaps the hardest question is: what are the obstacles that foreign investors face when making investment and how they can overcome it?

The first step: correct pricing

Valuation is important because it is the basis for foreign businesses to decide the value of investments. Determining the value of a business carefully is a crucial task for foreign investors if they want to ensure return on investment. They will need to focus on the key aspects of the business, especially the factors that create its value.

If investors do not fully understand the potential of the business or do not have enough data to make an investment decision, they will often cancel the plan. Investors not only need to find out the value of the business, but also need to know how their presence will promote the business of the partner. Therefore, domestic companies will practically benefit from providing detailed forecast indicators to investors.

In general, there are three main approaches used to value a firm: the Earnings approach, the Market approach, and the Net Asset approach. Choosing the appropriate approach depends largely on the characteristics of the valued firm. To be considered the most suitable, that method must best evaluate the current operating situation of the business.

Income approach and Market approach

The Income and Market approach are both implemented on the basis of "continuous operation" and "as the status quo". The Earnings approach, also known as the Discounted Cash Flow or DCF method, is used to determine the fair market value of a business based on future cash flows that may be generated in the future.

The Market approach is often considered when a company operates in a stable business environment and operates well. This will determine the market value of an important minority shareholder or major group of shareholders, on the basis that the business continues to operate continuously.

The Net Assets approach

The Net Assets approach is considered when a companys value comes primarily from assets, rather than expected future cash flows. This approach is to determine the fair market value of a business based on its net assets.

Choosing a suitable Vietnamese partner is certainly a difficult task, but it is not the biggest challenge for investors because even the financial information of the business that needs to be valued is still unclear.

Among the major challenges of corporate valuation, the first factor is the lack of detailed financial reports. The main reason is still the lack of legal constraints that requires private companies to conduct independent audits, especially with small and medium enterprises. Second, some companies focus on day-to-day operations and do not prepare detailed business forecasts. Even when making forecasts, they do not provide enough details to justify budget estimates as well as prepare long-term financial forecasts. Another barrier is the lack of business strategy and long-term vision of business owners, leading to the widening gap between them and investors.

The difference in the valuation of SOEs certainly affects the rate of equitization. These differences include the methods and criteria for the valuation, and large land assets of SOEs. However, that is not the only obstacle to equitization. Besides the lack of detailed information, investors are also concerned about transparency, fairness and the degree of control over their business activities here.

It is of paramount importance for domestic firms, both private and public, to agree with foreign investors on how to value firms. This will allow companies to sift through information tailored to the needs of their foreign partner. They should also conduct independent pricing before inviting investors into their business. That will allow domestic firms to identify key areas of interest to foreign investors, while avoiding possible shortcomings in the valuation process.

Supporting investors in assessing the capacity of domestic companies more easily is a determined condition to take advantage of FDI inflows into Vietnam. The secret to building a mutually beneficial relationship is: to be ready to respond to the legitimate questions of foreign investors.

Indochina International Investment & Appraisal Joint Stock Company (INA)

• Address: 121 Nguyen Van Troi, Ward 12, Phu Nhuan District, Ho Chi Minh City
• Hotline: 0934 252 707 / Email: info@inavn.vn